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Building a secure future with escrow’s extensive use cases

Building a secure future with escrow’s extensive use cases

By Ed Boal, Head of Legal at Shieldpay

Managing high-value, commercial transactions is no easy feat. Moving large sums of money from business to business, or between lots of stakeholders, is complex and can expose the transactional parties to unexpected or uninformed risks.  

No two transactions are the same. Even for highly acquisitive companies, there is no standard procedure for executing an M&A deal. The variables, such as number of transactional parties, source and currencies of the funds, value of the payments, funds held in escrow, to name a few, will vary from deal to deal and in turn, so will their risk profiles. 

In recent years, these complex, high-value deals have become increasingly challenging to manage due to a tougher economic climate, but also intensifying political situations across the globe which have impacted sanctions regimes and the legal and regulatory mandates for conducting due diligence on transactional parties. 

As businesses grapple with financial complexities and increased transactional risks, escrow services have become more commonplace. Acting not just as a solution, but as a strategic advantage, escrow provides a secure pathway to navigate the intricacies of modern financial dealings. With its many use cases, escrow becomes key to unlocking enhanced security, efficiency, and trust in corporate transactions.

Navigating financial transactions while ensuring security

Escrow dates back to medieval times where it was used for land trades, and has continued to be an essential mechanism for safeguarding funds for corporate and property transactions. But its uses have extended further, with it now being a cornerstone for effectively managing risk in commercial matters ranging from M&A to litigation, and many more.

In M&A, escrow accounts safeguard substantial sums, ensuring smooth and secure fund transfers when certain conditions have been satisfied.  The banking and finance sectors leverage escrow for securing bonds, loan facilities, and managing investor holdings, while capital markets platforms benefit from secure transactions between buyers and sellers. The recent collaboration between Shieldpay and TISE Private Markets exemplifies the integration of escrow into private securities transactions.

Escrow’s crucial role additionally extends to contentious scenarios, including arbitration, litigation, and employment disputes, where compensation funds or settlement monies need to be disbursed securely and efficiently to claimants at scale. 

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For construction and infrastructure projects, escrow facilities enable greater efficiency in managing project payments. The funds flow for these transactions can be complex and difficult to track due to the lack of transparency between parties.  Using an escrow facility, for example, a bridging lender can control the flow, releasing funds as milestone payments directly to subcontractors to reduce non-performance risks. This also creates a virtuous circle as it ensures that subcontractors are able to manage cash flow more effectively.

Similarly, international trade and shipping sectors also rely on escrow for managing tranche payments conditional on the delivery of service or goods.

Diverse applications of escrow

Escrow services extend far beyond conventional applications, embracing and supporting many industries with remarkable versatility. 

A stand-out example of escrow’s role in cutting-edge industries is its application in the biotechnology and renewable energy arenas. Escrow has been an integral mechanism in facilitating secure transactions related to carbon credit trading. The intricacies of intellectual property in the biotechnology and life sciences industries creates complexity which escrow solves for.  

Even in the realms of sports, media, entertainment, and luxury goods, escrow contributes to establishing trust and transparency. Whether handling transactions related to sponsorships, media rights, or luxury goods acquisitions, escrow ensures that financial dealings occur securely, instilling confidence for all parties involved.

Benefits of partnering with a third-party

Security in transactions is paramount in today’s threat landscape, and escrow is one of the key mechanisms for upholding this requirement. 

Escrow services are intended to mitigate risk, but beyond having control over the release of funds, working with a specialist escrow provider can add an additional layer of assurance and security. New technology-led providers have emerged to establish new standards of speed, transparency and security. 

Law firms, in particular, are partnering with FCA-regulated payment companies that have designed their services to uphold legal and compliance standards. These digital platforms provide transparency to support communications between parties and auditability. This assists businesses in building more trusted relationships with their clients while protecting both buyers and sellers from fraud. Through the use of automation, these providers are also able to undertake due diligence on large numbers of transactional parties and set-up escrow accounts in far less time than legacy analogue providers. 

Escrow services are not just a solution; they are becoming an essential part of how deals are executed. As businesses address a variety of complexities and risks, the benefits of escrow are clear.

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