Tighter regulation and soaring corporation litigation cases are driving increased demand for specialized escrow services.
When economies struggle, corporate litigation cases tend to soar. As regulations tighten—especially around anti-money laundering (AML) and know your customer (KYC) checks—banks and notaries without the requisite capabilities may back away from payment services and transaction monitoring.
In both cases, third-party escrow service providers can step in to fill the gap. They offer litigation escrow and paying agent solutions alongside the traditional M&A escrow. These activities are often complex and highly bespoke, requiring a depth of expertise that not every traditional escrow team can offer.
Litigation escrow
Litigation lawyers in many countries are busier than they have been in years. Disruption leads to dispute, and in Europe economies have been disrupted by high inflation, rising interest rates, and the war in Ukraine. Breaches of contract due to the pandemic are now also feeding through into a growing number of litigation claims.
Litigation procedures can take many years. In a growing number of cases, a sum of money is put aside in escrow, with all parties agreeing that it will be paid out based on the final judgment after appeal procedures have been exhausted.
A litigation escrow is often demanded by a judge, though lawyers representing both sides may agree that it is a necessary insurance policy against default or bankruptcy of one of the litigation parties.
Depositing an escrow sum with a specialized third-party agent ensures that the disputed money will be held in safekeeping, and that it will be distributed fairly according to the provisions of the escrow agreement at the end of the process.
Paying agency
Third-party escrow agents in Europe with a Payment Service Directive (PSD2) license can also act as a paying agent, a growing trend in the market.
Paying agent mandates are complex, involving the distribution of funds to hundreds—occasionally thousands—of beneficiaries in a short space of time. The role comes with obligations concerning transaction monitoring, KYC screening, and bank account checks. Payments must be made correctly and in a timely manner.
Strict regulation has made the process onerous to banks, notaries, and lawyers, who traditionally handled escrow work in-house. Lawyers want to focus on representing clients, not on the distribution of funds. Banks don’t often have the capacity to screen hundreds of parties at the same time because it is not part of their core focus.
Specialized third-party agents such as CSC have that capacity. We have the specialists and systems to offer the screening and transaction monitoring that payment services require. A growing number of banks and law firms are asking us to perform this role on their behalf.
How third-party escrow services can help
Due to the trends outlined above, there is more of a need for flexibility among escrow and paying agent service providers. CSC is increasingly being asked to bring escrow expertise to more atypical transactions. In a struggling economy, many parties to deals are looking for the added safety of third-party escrow or paying agent services.
For example, CSC is currently involved as a paying agent in a multibillion-euro pharmaceutical contract between some of the world’s largest pharmaceutical companies, a national government, and several major health insurance providers.
CSC can accommodate this bespoke transaction due to the expertise of our teams and our experience in tailoring services to meet unusual circumstances.
Because banks often no longer want to provide escrow and paying agent services and many other service providers do not have the requisite licenses, third-party service providers such as CSC fill the gap. Trends in the escrow market suggest that we will see many more non-standard deals in the next two or three years, where the onus is on third-party escrow and paying agent providers to offer highly tailored services and a flexible approach.
Find out more, our guide to best practices when working with escrow agents is available now. Download it here.
Why CSC?
CSC is a leading provider of global business administration and compliance solutions, including a comprehensive suite of administration, financial, and agency services for debt issuances, securitizations, structured finance transactions, and restructuring mandates. We have office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East, deploying experts in every market we serve. Our Global Capital Markets team has a wealth of expertise and deep institutional experience. We carefully analyze each deal and tailor services accordingly to provide bespoke solutions to our clients’ requirements.
We’re the trusted partner of choice for 90% of the Fortune 500®, 10,000 law firms, and more than 70% of the PEI 300. Headquartered in Wilmington, Delaware, USA, CSC has been privately held for more than 120 years and acts as stable and conflict-free provider. Our broad geographic coverage means we possess local knowledge and infrastructure to support capital market participants worldwide. We are the business behind business®. Learn more at cscgfm.com.