8/13/2019 5 Crucial Steps to a Seccessful Escrow Agreement
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In todays complex business deals, escrow agreements are often
the last item to be negotiated. Yet, their placeon the checklist
should not negate their importance as a critical risk mitigation
tool one that can give allparties in a deal an added level of
comfort.
The security procedures outlined in an escrow agreement, while
often not considered during negotiations ofthe underlying
transaction, can help attorneys protect their clients. Whether you
are working on a jointventure, a merger, an acquisition or an IPO,
a comprehensive escrow agreement can give you and your clientsthe
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. Theynow also want full
disclosure from their banks on the standard security procedures for
the distribution ortransfer of assets held in escrow accounts. Have
these security procedures been thoughtfully developed? Howare 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, whensetting up an escrow agreement,
there are steps to take to help ensure that your banks procedures
meet yourneeds. The primary goal of an escrow account is
safeguarding a clients funds and making sure that, when
its time to make disbursements, the intended beneficiaries
receive their funds, says Motwani. That requiresthat a
comprehensive set of policies and procedures always be in
place.
The starting point in evaluating a banks security procedures
should be the incorporation and review of thebanks standard
language in the draft escrow agreement. At J.P. Morgan, standard
escrow agreements areoffered for all types of transactions, and
stringent security procedures are included within these
standarddocuments. When we are dealing with a client who has a
proposed agreement that has been draftedelsewhere, we also insist
that J.P. Morgans security procedures be added to that document,
explainsMotwani. Its an added step we take to help protect our
clients.
Morgan | Five Crucial Steps to a Successful Escrow Agreement
https://www.jpmorgan.com/tss/General/Five_Crucial_Steps_to_a_
11/5/2013
8/13/2019 5 Crucial Steps to a Seccessful Escrow Agreement
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Setting Up Your Escrow Agreements
How can you ensure that your banks security procedures meet your
needs? There are several basic steps thatare necessary components
to all escrow agreements, including:
Always get it in writing. First and foremost, when drafting an
escrow agreement, make sure that itspecifies that all instructions
to the escrow agent mustbe in writing and that they must be signed
byauthorized representatives for all applicable parties.
1.
Clearly identify all authorized representatives.An escrow
agreement should limit the number ofpeople who can provide
instructions to the bank on behalf of each party. And the bank
should makesure they take instructions only from those persons that
each party to the agreement designated inwriting as an authorized
representative. Each person executing the final agreement should be
includedin the list of authorized representatives, but in the event
a signer is not available, Motwani recommendsthat additional people
be identified. Its important to take into account what will work
for a particulardeal. He advises. You dont want too few people on
the list, or too many. You should look to strikethe right balance
that works for each deal.
2.
Develop a schedule of authorized representatives. Its good
business practice, advises Motwani,
to add a schedule of all authorized representatives to an escrow
agreement. For agreements withJ.P. Morgan, the schedule should
contain authorized signers names, specimen signatures,
telephonenumbers and other contact information. It is then
incumbent upon the escrow agent to refer to thisschedule of
authorized representatives when examining all requests for
disbursing funds from theescrow account and to verify the validity
of each request by calling another authorized signer toconfirm the
request.
3.
Have a detailed process in place for changing authorized
representatives. People change jobs allthe time, explains Motwani,
so you need to be able to easily update the procedures and
requirementsfor changing authorized representatives and their
contact information. But Motwani cautions that the
process needs to be stringent enough to prevent a fraudster from
easily changing the authorizedrepresentatives list.
4.
Remember the callbacks! There are several situations that demand
that callbacks always beperformed.For example, specific
instructions by all parties for wire transfers should be included
ineach escrow agreement; if that is not possible, then it is
important to require that a callback beperformed after
disbursements are requested in writing by any authorized
representative. A callbackrequires that a bank employee call an
authorized representative to confirm all the details around
anyrequest for the movement of funds.
5.
Some requests should always trigger a callback, such as
distributions or transfers to beneficiaries other thanthe parties
signing the agreement, according to Motwani, (unless security
procedures for establishingStanding 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
abeneficiary, a callback should always be performed before any
funds are released according to the newinstructions.
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
escrowagreement, and see the added value and protection J.P.
Morgans standard security procedures provide.
Morgan | Five Crucial Steps to a Successful Escrow Agreement
https://www.jpmorgan.com/tss/General/Five_Crucial_Steps_to_a_
11/5/2013
