In today’s complex business deals, escrow agreements are often the last item to be negotiated. Yet, their place on the checklist should not negate their importance as a critical risk mitigation tool — one that can give all parties in a deal an added level of comfort.
The security procedures outlined in an escrow agreement, while often not considered during negotiations of the underlying transaction, can help attorneys protect their clients. Whether you are working on a joint venture, a merger, an acquisition or an IPO, a comprehensive escrow agreement can give you and your clients the crucial support needed to make your commercial transaction a reality.
Wanted: Full Disclosure from Bankers
Today, many dealmakers are concerned with more than just the basic terms of an escrow agreement. They now also want full disclosure from their banks on the standard security procedures for the distribution or transfer of assets held in escrow accounts. Have these security procedures been thoughtfully developed? How are they monitored? Will they effectively mitigate the risk of potential fraud or clerical errors?
According to Rocky Motwani, global head of Escrow Services at J.P. Morgan Treasury Services, when setting up an escrow agreement, there are steps to take to help ensure that your bank’s procedures meet your needs. “The primary goal of an escrow account is safeguarding a client’s funds and making sure that, when it’s time to make disbursements, the intended beneficiaries receive their funds,” says Motwani. “That requires that a comprehensive set of policies and procedures always be in place.”
The starting point in evaluating a bank’s security procedures should be the incorporation and review of the bank’s standard language in the draft escrow agreement. At J.P. Morgan, standard escrow agreements are offered for all types of transactions, and stringent security procedures are included within these standard documents. “When we are dealing with a client who has a proposed agreement that has been drafted elsewhere, we also insist that J.P. Morgan’s security procedures be added to that document,” explains Motwani. “It’s an added step we take to help protect our clients.”
Setting Up Your Escrow Agreements
How can you ensure that your bank’s security procedures meet your needs? There are several basic steps that are necessary components to all escrow agreements, including:
Some requests should always trigger a callback, such as distributions or transfers to beneficiaries other than the parties signing the agreement, according to Motwani, (unless security procedures for establishing “Standing Settlement Instructions” for that beneficiary are established by an Authorized Representative). Similarly, if either party to an agreement wants to change its own wire transfer or standing instructions for a beneficiary, a callback should always be performed before any funds are released according to the new instructions.
“These steps may result in an escrow agreement that undergoes significant changes and multiple reviews,” Motwani says. “But we ask our clients to look beyond the “red” inserts we add to a proposed escrow agreement, and see the added value and protection J.P. Morgan’s standard security procedures provide.”
For More Information
Contact Nick Scarabino, Managing Director & Global Head of Escrow Sales at Nicholas.A.Scarabino@jpmorgan.com