Nowadays online financial frauds have become very common where the fraudsters use various tricks to get your sensitive details like PAN, Aadhaar, OTP, PIN, CVV, etc, to steal your money digitally. Apart from these, there is one more modus operandi of fraudsters — let’s say, someone will call you like a real estate agent and promises you to hand over a well-furnished house at the cheapest rate and would want some advance money to be transferred immediately to him, and if you do it, he disappears. Here comes the role of an escrow account to prevent such financial frauds.
What Is An Escrow Account?
An escrow account is a temporary financial arrangement in which an unbiased third party holds and regulates the payment of funds or assets between two or more parties involved in a transaction. The funds or assets are held in an escrow account, which is managed by the escrow agent, until all the terms and conditions of the transaction are met. For example, you will transfer the money in the escrow account and the third party will transfer the money to the real estate agent once all the conditions of the deal are met.
The escrow agent is typically a neutral third party, such as a lawyer or a financial institution, who has no interest in the transaction beyond ensuring that it is carried out according to the agreed-upon terms. Escrow systems are commonly used in a variety of transactions, including real estate purchases, online purchases, and business transactions, as they provide a secure way for parties to transact without the risk of fraud or default.
For What Purposes Are Escrow Accounts Used?
Generally, the escrow accounts are used for sale-purchase transactions, real estate debt transactions, revenue/ profit sharing arrangements, mergers and acquisitions, project financing and lending arrangements, trust and retention transactions.
How Can It Mitigate Fraud Risks?
Ashwin Chawwla, founder & MD of Escrowpay, said, “To transact using Escrow, you need to complete a registration process that will require a complete KYC and background check on parties. In a normal business transaction without the escrow, it is more of a hunch than a sure multipoint check with an assurance to get paid on time.”
He added that escrow accounts are managed by the appointed escrow agent. The agent releases the funds only upon the fulfilment of predetermined contractual obligations (or upon receiving appropriate instructions).
Using an escrow service allows parties to reduce the risks associated with transactions by having a third-party act as a custodian of assets until the terms of the contract are met. This effectively eliminates the risk of the buyer losing cash in the transaction due to non-delivery. And on the other side, sellers receive assurance that the funds for the transaction will be available once they provide the contracted product or service.
“Escrow services can provide an additional layer of security for transactions during uncertain market conditions, like the COVID-19 pandemic. As we’ve seen over the past year, when products are in high demand, buyers can run the risk of paying for products that arrive too late, never arrive, or that are not of the agreed upon quality,” Chawwla said.
He also said by utilising escrow, buyers can be assured that they do not pay for products that don’t meet the specifications of the contract. Additionally, during turbulent market times, sellers may send products to buyers who have become insolvent or that are unwilling to pay in advance. Escrow removes that risk by ensuring that funds are available to both sides when the time comes.
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