The escrow account is less often used in international trading because there is a presumtion that the escrow agent is known and trusted by both parties, a situation that can't always be achieved across international borders.
Escrow is a legal arrangement in which one party deposits funds (usually although property and other tangibles can also be held in escrow) into an escrow account under the supervision of a neutral third party, the escrow agent, until the terms of an agreement or other ruling instrument have been met. Once the terms have been met, the escrow agent releases the funds to the party designated in the agreement.
In plainer English that means that if you intend to buy $5,000 worth of merchandise from a supplier via escrow, you and the supplier select an escrow agent, often a bank, set up an escrow account with an agreement that says, 'When I receive a satisfactory shipment from my supplier, release the money to him.' The escrow account is useful because you as buyer know that you will not pay until you have the product that you need. The supplier knows that the money exists and that he can access it by supplying the goods as ordered.
The downside of escrow is the need to pay fees to the intermediary as well as the time needed to negotiate the terms of the escrow agreement. Consequently, escrow is usually used for large purchases.
www.escrow.com is a popular online escrow service. Their directions for using their escrow service provide a good illustration of the process:
- Agree to use escrow. Either the seller or the buyer can contact the other to propose using escrow. Both must agree to use escrow before the escrow process begins.
- Set and agree on terms. Both the buyer and the seller need to agree to the terms of the escrow process, including:
- Who pays shipping
- How much shipping will cost
- Length of the inspection period
- Who pays escrow fees
- Are shipping fees refundable
- Conditions for accepting the item
- Buyer pays into escrow. The buyer now uses a credit card, cashiers check, money order, personal check, or business check to pay the agreed-upon amount into escrow.
- Seller ships the item. The seller ships the item directly to the buyer using a traceable shipping method (FedEx, UPS, United States Postal Service Delivery Confirmation). The seller is required to provide the escrow company with the tracking number.
- Buyer inspects the item. The buyer now gets to look over the item and notify the escrow company whether they accept it or not.
- If the item is accepted (or the inspection period runs out) the funds are paid to the seller by check within five business days (may be longer outside of the US).
If the item is not accepted, the buyer must return the item to the seller. In this case, the buyer is required to pay the return shipping fee and the escrow fee. This rule minimizes casual returns. Payment, minus the escrow fees, is then returned to the buyer.
Fraudulent Escrow Companies
There are many, many fraudulent escrow companies. Do not be enticed into using any escrow company that you cannot verify by some independent means. The problem of assuring both parties that an escrow agent is trustworthy is one of the major impediments to using escrow for international payments. Other reliable international escrow companies are:
Another possible, easily verifiable source of escrow services can be international banks with a presence in the buyer’s and seller’s country.
Escrow is a low risk option but is best used for large purchases and may be difficult to accomplish internationally.