Financial Term of the week - ESCROW

For the past few weeks we were mostly dealing with the capital markets section, so we thought lets shift our focus little bit towards Banking and International finance. The term which we will introduce to you is ESCROW.

ESCROW
The word derives from the old French word escroue, meaning a scrap of paper or a roll of parchment; this indicated the deed a third party held until a transaction was completed.

Simply defined, an ESCROW is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a particular condition or event.

example: If you intend to buy $5,000 worth of merchandise from a supplier via escrow, you and the supplier select an escrow agent, often a bank, set up an escrow account with an agreement that says, 'When I receive a satisfactory shipment from my supplier, release the money to him.' The escrow account is useful because you as buyer know that you will not pay until you have the product that you need. The supplier knows that the money exists and that he can access it by supplying the goods as ordered.

Types
1) Internet escrow
2) Banking
3) Intellectual property
4) Law
5) Real estate

Even though there are different types of escrow, the basic premise remains the same It is used to build trust & bring transparency between the players involved in the trade.

Lets now look into the inner aspects of escrow

Why do we need an escrow?
Whether you are the buyer, seller, lender, or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.

note: Be sure to choose an independent licensed escrow provider who is 100% neutral , licensed by the Department of Corporations (DOC), requiring adherence to the most stringent standards in the industry, and whose sole business is providing escrow.

How does it work?
The principals to the escrow – buyer, seller, lender, borrower – cause escrow instructions, most usually in writing, to be created, signed and delivered to the escrow officer. If a broker is involved, he will normally provide the escrow officer with the information necessary for the preparation of your escrow instructions and documents.
The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required in the escrow can be met, the escrow will be "closed." Each escrow, although following a similar pattern, will be different in some respects, as it deals with YOUR property and the transaction at hand.

Duties of an escrow holder
1) following the instructions given by the principals and parties to the transaction in a timely manner.
2) handling the funds and/or documents in accordance with instructions.
3) paying all bills as authorized and responding to authorized requests from the principals.
4) closing the escrow only when all terms and conditions have been met; and, distributing the funds in accordance with instructions and porviding an accounting for the same – the Closing, or Settlement Statement.

Recent news involving escrow
President Barack Obama wants BP Plc to set up an escrow account to pay the claims for damages caused by its oil spill in the Gulf of Mexico. They want to make sure the money is escrowed for the businesses and want to make sure the money is independently administered so it’s not slow-walked. BP Plc agreed to set up $20 bn escrow fund to compensate for the oil spill damages.

For more information on escrow, please follow the below links
http://www.allisonmccloskeyescrow.com/what-is-escrow.asp
http://articles.esources.co.uk/id/111/
http://en.wikipedia.org/wiki/Escrow
http://www.msnbc.msn.com/id/37725103/ns/disaster_in_the_gulf/
http://www.business-standard.com/india/news/us-wants-bp-to-setescrow-account-for-oil-spill-damages/398109/

Srikanth Reddy
MBA Core 09-11