Escrow Agreement

An escrow agreement has three parties: the one who hands something over, the one who is to receive it, and the agent who holds it in between. Suppose a buyer of a company agrees with the sellers that part of the price will be set aside in case a warranty claim arises. Neither side wants the other to hold that money. They appoint a bank to hold it for both of them. The table shows what each party does and what it depends on.

An escrow agent is a custodian. Banks, notaries and law firms commonly act as escrow agents. Which professions may hold money for others, and under what rules, depends on national law.

Most often money is held, and it is released when an agreed event happens or an agreed date passes. In a company sale the usual reason is to give the buyer something to claim against if a warranty proves untrue, or if the price is adjusted after closing. Documents can be held too, such as signed share transfer papers that are released only when payment arrives.

The release conditions are the heart of the agreement. They are written so that the agent never has to weigh evidence. Common triggers are a joint written instruction from both parties, the passing of a date with no claim notified, and a final decision of a court or arbitral tribunal. If the parties disagree, the agent simply keeps holding. The agreement also says who pays the agent's fee, and what the agent may do if it receives conflicting instructions.

Yes, where the agent is covered by anti-money laundering rules, and professional agents usually are. Banks are obliged entities as credit institutions under Article 3 of the EU Anti-Money Laundering Regulation. Notaries and lawyers are obliged entities when they act for a client in a financial transaction, or assist with transactions that concern the buying and selling of business entities or the managing of client money (Article 3(3)(b), points (i) and (ii)). Holding part of the price of a company for the parties is very likely to be work of that kind.

An obliged entity applies customer due diligence when it establishes a business relationship (Article 19(1)). Article 20(1) lists the measures. The agent identifies the customer and verifies its identity. It identifies the beneficial owners. It checks both against sanctions lists, and it verifies that the person who signs for a company is authorised to do so. Under Article 23(1), verification as a rule takes place before the relationship is established. A bank may open the account earlier, but no transaction may be carried out through it until the identity checks are complete (Article 23(3)). The Regulation applies from 10 July 2027. Until then, the national laws that implement the EU anti-money laundering directives apply.

Who is the customer? Both the depositor and the beneficiary sign the escrow agreement, and both give the agent instructions. For legal professionals, Article 19(6)(b) settles one case. A notary or lawyer who is the only legal professional intermediating a transaction must treat both parties as customers. Where each side has its own lawyer and a third firm holds the money, or where the agent is a bank, the Regulation does not address the escrow agent in terms. The safe assumption is that the agent will ask both sides for the same documents.

The agent has to refuse. Under Article 21(1), an obliged entity that cannot apply the customer due diligence measures must not establish the business relationship or carry out the transaction. An escrow agent in that position will not accept the money, however close the signing date is.

This is a practical risk in cross-border deals. The escrow agreement is often one of the last documents to be drafted, while the agent's checks take the longest when a party is owned through companies in several countries. Sending the ownership chain and proof of who may sign when the agent is first approached avoids a late surprise.

In principle yes. Under the eIDAS Regulation an electronic signature cannot be refused only because it is electronic, though national rules on form stay in place. Those rules matter most where a notary acts as the agent, because notarial procedure is national.

The signatures that carry the most risk come later. Money leaves escrow on a release instruction, and an agent that pays out on a forged instruction has paid the wrong person. The agreement should therefore say who may sign an instruction for each party, and how the agent will check the signature. A qualified electronic signature rests on a certificate issued after the provider verified the signer's identity (Article 24(1)), which gives the agent something firm to check.

The agent keeps its customer due diligence file and the records of each payment in and out. Article 77 requires an obliged entity to keep both for five years from the end of the business relationship. After that the personal data must be deleted, unless another law requires it to be kept for longer.

The parties need their own file: the signed agreement, every instruction sent to the agent, the agent's confirmations and the account statements. If a release is disputed later, the question will be who instructed what and on which date.