Escrow Accounts in International Trade and Investment Transactions

In cross-border transactions, trust is often limited. The buyer may not want to pay before receiving goods, shares or assets. The seller may not want to deliver before receiving funds. Banks, logistics providers, brokers and counterparties may be located in different jurisdictions, each with different legal systems and enforcement standards.

An escrow arrangement can help bridge this trust gap.

When properly structured, escrow protects both sides by placing funds, documents or assets under the control of an independent third party until agreed conditions are met.

However, escrow is not automatically safe. The quality of protection depends on the escrow agent, contractual wording, release conditions, verification process, jurisdiction, and the real ability to enforce the arrangement.

What Is an Escrow Account?

An escrow account is a controlled account where funds are held by a neutral third party until predefined contractual conditions are satisfied.

The escrow agent may be:

• a bank;

• a licensed payment institution;

• a law firm;

• a notary;

• a regulated fiduciary;

• a specialised escrow provider.

In some transactions, escrow may also be used to hold documents, shares, title instruments or other assets, not only cash.

The central principle is simple: the buyer does not pay directly to the seller, and the seller does not rely only on the buyer’s promise to pay. Instead, performance and payment are linked through a controlled release mechanism.

Why Escrow Is Used

Escrow is commonly used when parties need protection against non-performance, fraud, payment default or uncertainty around delivery.

It may be useful in:

• commodity trading;

• shipment-based transactions;

• asset acquisitions;

• share purchase agreements;

• real estate transactions;

• equipment sales;

• project finance;

• investment rounds;

• settlement agreements;

• debt recovery arrangements;

• joint ventures;

• milestone-based service contracts.

Escrow can reduce risk where there is limited trust, a new counterparty, complex delivery conditions, or a need to verify documents before funds are released.

How Escrow Works

A typical escrow structure includes several steps:

1. Escrow Agreement

The parties sign an escrow agreement defining:

• parties to the transaction;

• escrow agent;

• amount or assets placed in escrow;

• account details;

• conditions for release;

• required documents;

• deadlines;

• dispute procedure;

• fees;

• governing law;

• liability of the escrow agent.

The escrow agreement should be precise. Ambiguous wording can make the arrangement difficult to use when a dispute arises.

2. Deposit of Funds or Assets

The buyer, investor or obligor deposits funds into the escrow account.

In some cases, documents, shares, title deeds, warehouse receipts or other instruments may also be deposited.

It is important to confirm that funds are actually received in the escrow account and not merely promised through a screenshot, email or unverified payment instruction.

3. Performance or Delivery

The seller, borrower, project company or other party performs the required obligation.

This may involve:

• shipment of goods;

• delivery of documents;

• transfer of shares;

• completion of due diligence;

• registration of ownership;

• regulatory approval;

• project milestone completion;

• signing of settlement documents;

• release of security interests.

4. Verification of Conditions

Before funds are released, the escrow agent or designated verifier checks whether the release conditions have been satisfied.

This may include review of:

• bill of lading;

• CMR or transport document;

• inspection certificate;

• certificate of origin;

• customs documents;

• warehouse receipt;

• share transfer documents;

• corporate approvals;

• court or settlement documents;

• bank confirmation;

• notarial confirmation;

• delivery acceptance certificate.

The verification mechanism must be defined in advance. Otherwise, the escrow agent may refuse to act or freeze the funds until the parties agree.

5. Release of Funds

Once the conditions are met, the escrow agent releases funds to the beneficiary according to the agreed instructions.

If conditions are not met, the escrow agreement should define whether funds are returned, held pending resolution, partially released, or subject to dispute procedure.

Main Types of Escrow Structures

1. Payment Escrow

This is the most common structure. The buyer deposits funds, and the seller receives payment only after delivery or document compliance.

Useful for:

• goods transactions;

• equipment purchases;

• high-value services;

• first-time counterparties;

• transactions with delivery risk.

2. Document Escrow

In document escrow, key documents are held by a third party and released only when conditions are satisfied.

This may include:

• title documents;

• bills of lading;

• share certificates;

• notarial documents;

• signed transfer instruments;

• warehouse receipts;

• release letters.

Document escrow is particularly useful when control over documents effectively controls the asset.

3. Share or Asset Escrow

In M&A, investment or joint venture transactions, shares or ownership instruments may be held in escrow pending payment, regulatory approval or fulfilment of post-closing obligations.

This structure can protect both buyer and seller during a transitional period.

4. Retention Escrow

A portion of the purchase price is retained in escrow after closing to cover potential claims.

Common in:

• M&A transactions;

• asset purchases;

• warranty claims;

• tax liabilities;

• undisclosed debts;

• post-closing adjustments.

For example, 10–20% of the purchase price may be held for 6–18 months to cover breach of warranties or hidden liabilities.

5. Milestone Escrow

Funds are released in stages as specific milestones are achieved.

Useful for:

• construction projects;

• technology development;

• consulting mandates;

• project finance;

• industrial equipment delivery;

• recovery mandates;

• settlement agreements.

This structure reduces the risk of paying the full amount before performance is verified.

6. Litigation or Settlement Escrow

Escrow may be used in disputes where one party agrees to pay, but funds are released only after certain legal steps are completed.

For example:

• withdrawal of claims;

• signing of settlement agreement;

• release of security;

• confirmation from court or bailiff;

• transfer of documents;

• termination of proceedings.

This can prevent one party from performing while the other fails to complete its side of the settlement.

Key Release Conditions

The strength of an escrow depends on the clarity of its release conditions.

Common release triggers include:

• receipt of original shipping documents;

• confirmation of goods inspection;

• customs clearance;

• delivery acceptance;

• registration of title;

• signed closing documents;

• regulatory approval;

• written joint instruction from both parties;

• certification by an independent expert;

• notarial confirmation;

• court confirmation;

• expiry of claim period.

The best release conditions are objective, verifiable and not dependent on vague satisfaction.

For example, “funds are released when the buyer is satisfied” is weak.“funds are released upon presentation of SGS inspection certificate confirming quantity and quality according to contract specifications” is stronger.

Escrow vs Letter of Credit

Escrow and Letters of Credit may both be used to reduce payment risk, but they work differently.

Escrow

Funds are deposited with a third party and released when agreed conditions are met.

Escrow is often more flexible and can be adapted to complex commercial arrangements.

Letter of Credit

A bank undertakes to pay against compliant documents under the rules of the credit.

LCs are more standardised in international trade but require careful wording and bank involvement.

Which is better?

It depends on the transaction.

Escrow may be preferable when:

• the transaction has bespoke milestones;

• the parties need flexible release conditions;

• documents are not standard shipping documents;

• a settlement or asset transfer is involved;

• a neutral legal or fiduciary holder is required.

LC may be preferable when:

• the transaction is a standard shipment of goods;

• banks are comfortable with the documents;

• the seller wants a bank payment undertaking;

• the buyer wants payment only against shipping documents.

In some transactions, escrow and LC structures may be combined.

Main Risks of Escrow Arrangements

1. Fake Escrow Agent

Fraudsters may propose a fake escrow company, fake law firm or fake payment platform controlled by the counterparty.

The website may look professional, but the entity may be unlicensed or recently created.

Always verify:

• legal registration;

• regulatory status;

• professional licence;

• bank account ownership;

• physical address;

• reputation;

• independent references;

• whether the proposed agent is truly neutral.

2. Escrow Account Not in the Agent’s Name

A major red flag is payment to an account held by an individual, broker, agent or related company rather than the recognised escrow agent.

The account holder must match the escrow structure.

Funds should not be sent to unrelated third-party accounts without a clear legal reason and verification.

3. Unclear Release Conditions

If release conditions are vague, the escrow may become a source of dispute rather than protection.

Examples of weak wording:

• “upon successful completion”;

• “after delivery”;

• “upon buyer’s approval”;

• “when documents are acceptable”;

• “after confirmation by the parties.”

These phrases must be replaced with objective, document-based triggers.

4. No Dispute Mechanism

The escrow agreement must define what happens if one party claims that conditions are met and the other disagrees.

Without a dispute mechanism, funds may remain frozen for a long time.

A proper agreement should include:

• notice procedure;

• objection period;

• expert determination;

• arbitration or court jurisdiction;

• treatment of undisputed amounts;

• agent’s right to hold funds pending resolution.

5. Wrong Jurisdiction

The jurisdiction of the escrow agent and governing law matters.

A weak jurisdiction may create enforcement difficulties, especially if the escrow agent fails to act, becomes insolvent or is subject to local restrictions.

For high-value transactions, the escrow agent should be located in a credible jurisdiction with enforceable legal remedies.

6. Conflicts of Interest

An escrow agent recommended by one party may not be truly independent.

This is especially risky where the agent has a commercial relationship with the buyer, seller, broker or intermediary.

Independence should be checked before funds are transferred.

7. Fraudulent Screenshots and Payment Confirmations

Fraudsters often send fake screenshots showing that funds have been deposited into escrow.

Only direct confirmation from the escrow agent and its bank should be accepted.

Never rely on:

• screenshots;

• forwarded emails;

• payment slips without bank verification;

• PDF confirmations from unknown platforms;

• broker statements.

Escrow Fraud Red Flags

A transaction should be treated with extreme caution if:

• the counterparty insists on using a specific unknown escrow provider;

• the escrow website was recently created;

• the escrow agent is not regulated or verifiable;

• funds are requested to a third-party or personal account;

• the account name does not match the escrow agent;

• the escrow agreement is vague or very short;

• there is no governing law or dispute clause;

• release conditions are subjective;

• the counterparty refuses bank or lawyer verification;

• communication uses free email accounts;

• the transaction is rushed;

• the escrow agent refuses video calls or independent contact;

• the “escrow confirmation” comes only through the counterparty.

Escrow should create transparency. If it creates more opacity, it is not a safe structure.

Best Practices for Using Escrow

Before accepting an escrow structure, companies should:

• select an independent and reputable escrow agent;

• verify the agent’s legal and regulatory status;

• ensure the escrow account is held in the correct name;

• review the escrow agreement before transferring funds;

• define objective release conditions;

• align escrow terms with the main contract;

• include clear deadlines and default consequences;

• define dispute resolution procedure;

• avoid third-party accounts;

• verify all payment confirmations directly;

• confirm fees and responsibilities;

• involve legal and banking advisers for high-value transactions.

For complex trade or investment deals, the escrow agreement should not be treated as an administrative document. It is a core risk-control instrument.

Example: Escrow in a Commodity Transaction

A buyer agrees to purchase a cargo from a new supplier. The supplier does not want to ship without payment assurance, while the buyer does not want to prepay before confirming shipment and documents.

A possible escrow structure may include:

1. buyer deposits funds into escrow;

2. seller provides proof of product availability;

3. independent inspection is conducted;

4. goods are loaded and shipping documents are issued;

5. escrow agent receives required documents;

6. buyer has a short objection period;

7. funds are released to the seller if documents match the agreed conditions.

This structure protects the seller from non-payment and protects the buyer from sending funds directly before shipment is verified.

Example: Escrow in a Settlement Agreement

A debtor agrees to pay an outstanding claim, but only if the creditor withdraws proceedings or releases certain claims.

A safer structure may be:

1. debtor deposits funds into escrow;

2. creditor signs settlement and release documents;

3. court or bailiff confirms procedural steps;

4. escrow agent releases funds to the creditor;

5. if conditions are not met by a deadline, funds are returned or held pending dispute resolution.

This avoids the classic problem where one party performs first and the other delays or refuses to complete its obligations.

Strategic Use of Escrow

Escrow is not only a payment tool. It can also be used strategically to structure trust in situations where direct performance is risky.

It may help to:

• reduce prepayment risk;

• strengthen negotiation confidence;

• protect against document fraud;

• secure settlement performance;

• align payment with milestones;

• reduce enforcement uncertainty;

• make transactions possible between unfamiliar parties;

• create objective evidence of readiness to perform.

However, escrow must be properly designed. A weak escrow can create a false sense of security.

Conclusion

Escrow accounts are powerful tools for protecting capital and reducing transaction risk in international trade, investment, settlements and complex commercial arrangements.

But escrow is not automatically safe. Its effectiveness depends on the credibility of the escrow agent, the legal structure, the account ownership, the release conditions, the dispute mechanism and the ability to verify performance.

A properly structured escrow arrangement can protect both parties and make a transaction more secure. A poorly structured or fake escrow can become part of a fraud scheme.

At AVIN Strategic Intelligence, we help companies assess escrow structures, verify counterparties and escrow agents, review transaction risks, identify fraud indicators and design safer mechanisms before funds, assets or documents are exposed.