Need for speed: Escrow arrangements for high-demand products from domestic and foreign companies
Recently, we’ve been receiving calls from various parties working on deals to buy high-demand products, such as medical supplies and equipment, from domestic and foreign vendors with which their firms haven’t previously done business. Companies and their legal counsel may face a need to move quickly when a deal comes into focus. Following is a quick overview of a typical buy/sell escrow arrangement, including how to be prepared in advance.
Escrow arrangements protect all parties from misrepresentation
Avoiding fraud is a paramount concern in any context, but the stakes are even higher when the market environment is strained and the needed products are mission-critical. An escrow arrangement helps protect your organization against sending a deposit only to find that the product never arrives, or the product that does arrive was misrepresented or outright wrong.
Of course, companies selling to a new buyer face similar risks. In either direction — buying or selling —, unless or until a letter of credit or other financial arrangement is established, an escrow is a well-established and well-accepted way to protect all parties executing the escrow agreement.
Escrow account setup can happen in as little as a day—but it pays to be ready
Like other bank services, escrow arrangements are subject to “know your customer” standards and other rules under the Patriot Act and Bank Secrecy Act. When foreign parties are involved, the documents required can be slightly more extensive than domestic entities. This isn’t a surprise to most reputable overseas sellers.
The first step is to create an escrow agreement, usually working from an existing template. For example, we have templates for several common escrow types, including buy/sell involving domestic and foreign parties. Then, the escrow agent will carry out its responsibility to know the parties involved. Have a current W-9 form at hand, as well as a business description and copy of your formation documents (or current state-issued certificate of good standing). As with other banking arrangements, you’ll also need to provide information about beneficial owners for privately held companies.
Similar information is needed for the foreign entity, though it may be possible to initiate the agreement while receipt of a W-8 form is still pending. (However, a W-8 is required before funds can be disbursed to the foreign party, including any foreign beneficiaries.). Foreign entities also need to disclose any business with senior political figures and say whether they offer any financial-transfer services such as check-cashing or currency exchanges. A short list of requirements also applies to beneficial owners and any foreign individual serving as representative to the agreement.
To protect your interest, the process should be expedited quickly, including thorough review by legal counsel. We’ve seen escrow agreements finalized in a single business day. Once that’s complete, your escrow agent can accept and hold funds in safekeeping in accordance with the agreement. Often the next step is timely disbursements of escrow funds to the seller, typically via wire or SWIFT payments for international transactions, after products are received in good order by the buyer.
As you work to fulfill your critical business needs during this time, it’s important to have a clear understanding of the benefits of escrow arrangements for your foreign and domestic transactions.
UMB is a nationally recognized provider of corporate trust and escrow services. For more than 75 years, UMB has been a dependable provider of corporate trust and escrow services, administering over $91 billion and 8,100 transactions. To learn more about our offerings or get in touch with our team, visit umb.com/corporatetrust.
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