An escrow agent acts as an independent third party between a buyer and a seller. It holds the money, assets and/or documents the buyer has paid for an item until both the buyer and seller are satisfied that ownership of that item has transferred successfully to the buyer.
Escrow services mainly used to mitigate financial risk, critically important when closing transactions, especially when one or more parties are located in different jurisdictions.
Types of risk usually covered:
• Counterparty risk – where one party is concerned the other will be unable to meet its obligations. Funds are held in escrow account until one or both parties meet certain legal preconditions.
• Price risk – where there is difficulty in valuing an asset. The price differential may be held in escrow account until actual performance can be measured.
• Execution risk – where the parties wish for a transaction to be executed according to a pre-agreed sequence of events. The funds are held in escrow and released following the provisions of the Escrow Agreement.