The Hindu Business Line : Is there a way to safely escrow our trust in governance?

THE VOLCKER Report on the manipulations in the `Oil-for-Food Programme' (OFFP) is much in news. One of its chapters is titled ``The Escrow Bank and Conflicting Interests''. If you wonder what escrow is about, it is just the time for a zero base on the same.

More so because escrow is in the news for other reasons too. "Our title and escrow database must be readily accessible to 15,000 users across 1,300 offices," says Larry Godec, senior vice-president and chief information officer, First American Title Insurance Company, on www.noticias.info. A report on www.inman.com speaks of escrow numbers, names of escrow officers and closing dates for all properties stored on Blackberry device. And SpaceShot has announced a partnership with Rocketplane; "they have executed an escrow agreement that provides maximum protection of the money to buy suborbital spaceflight tickets," says www.spaceref.com in a story that talks of "awarding space trips to people paying under five dollars"!

Escrow is "a bond, deed or other document kept in the custody of a third party and taking effect only when a specified condition has been fulfilled," defines Concise Oxford English Dictionary. Escrow, as Bloomberg Financial Glossary defines, is property or money held by a third party until the agreed upon obligations of a contract are met.

"Escrow is a legal arrangement whereby a thing (often money, but sometimes other property such as art, a deed of title, or software source code) is delivered to a third party (called an escrow agent) to be held in trust pending a contingency or the fulfilment of a condition or conditions in a contract," defines Wikipedia. "Upon that event occurring, the escrow agent will deliver the thing to the proper recipient, otherwise the escrow agent is bound by her or his fiduciary duty to maintain the escrow account." Escrow can refer to "a special account that a lender uses to hold a borrower's monthly payments for property taxes and insurance," informs www.yourwebassistant.net.

A mid-17th century word, as Encarta informs. "Anglo-Norman escrowe `scroll,' variant of Old French escroe (see scroll)," it adds. The French connection is what one sees in the escrow chapter of the Volcker Report that begins by recounting the selection of Banque Nationale de Paris S.A., now BNP Paribas, as "the Programme's escrow bank."

Escrow bank means the financial institution designated as the escrow bank pursuant to an escrow agreement entered into by the borrower, as per a definition on www.state.nj.us. And `escrow account' means the account established with the escrow bank for receipt, investment and disbursement of escrow monies. "Originally escrow meant the deed held by the escrow agent," states http://dictionary.law.com. "Colloquially, the escrow agent is called an `escrow,' while actually the escrow is the account and not a person." A helpful explanation is on www.investopedia.com. "An escrow account can be used in the sale of a house, for example.

If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow. In this case, the buyer of the property will deposit the payment amount for the house in an escrow account held by a third party." And that may well be a bank. Escrow gives assurance to the seller about the capability of the buyer to pay the money. "Once all of the conditions to the sale are satisfied, the escrow transfers the payment to the seller, and title is transferred to the buyer," states Investopedia.

"While escrow is best known in the context of real-estate, escrow companies are also commonly used in the transfer of higher value properties like Web sites and businesses," notes http://en.wikipedia.org. "Real estate agents are in some jurisdictions considered to act as escrow agents when they accept deposits for the purchase of real property."

How does escrow operate in the software field? "Software source code escrow agents hold source code in escrow in the event that the creator of the source code refuses or is unable to release the source code to the user of specialised software if that software no longer functions or in certain other events." `Source code escrow' is "an arrangement where some source code is held in escrow by a third party as long as it is supported by the vendors, but should they cease to support it, it becomes the property of the purchasers so that they can arrange for its continued maintenance," defines http://foldoc.doc.ic.ac.uk.

Another specialised application of escrow is `key escrow', in the context of conducting "covert surveillance within the changing environments brought about by new technologies", as the Centre for Democracy and Technology (www.cdt.org) explains in one of its reports. "Key escrow is an arrangement in which the keys needed to decrypt encrypted data are held in escrow by a third party, so that someone else (typically government agencies) can obtain them to decrypt messages which they suspect to be relevant to national security," states the ever-helpful Wiki about a controversial idea.

Through the OFFP, the UN created "a dependency that is totally unique for its kind," writes Christian H{macr}rleman in a poignant article on www.transnational.org. And the escrow for the Programme was a unique and a specialised case. "BNP was named by Iraq despite the fact that it had not been included on the United Nations' long list of most technically qualified banks," noted the February 2005 interim report of Volcker.

In June 1996, when six banks on the short-list were invited to submit proposals for the Programme's escrow account contract, "the Request for Proposal (RFP) was less detailed than the norm; the deadline for response to the RFP was shorter than normal; and the evaluation and selection were completed more quickly than usual." One learns from the Volcker Report that BNP's duties as the escrow bank included the ``establishing and managing an escrow account to receive proceeds from the sale of Iraqi oil and to disburse funds for Iraq's purchase of humanitarian goods,'' apart from confirming letters of credit (LCs) issued from banks retained by companies buying oil from Iraq, and issuing letters of credit for the purchase of humanitarian goods.

`Escrow analysis' is "the periodic examination, by the lender, of an escrow account for purposes of determining if the amount withheld from a borrower's monthly mortgage payment is sufficient to pay for expenses such as property taxes and insurance," defines Homeglossary.com, ``The World's Most Complete Real Estate Directory''. "Companies selling to Iraq were formally paid from an escrow account run by the UN. In itself, it was all above board. But the seller would agree to slip cash back to Saddam's regime, usually about 10 per cent of the price," reports Fraser Nelson on www.thebusinessonline.com.

An analysis of covert payments is found in section IV of chapter 4 of Volcker's recent report. BNP was among the banks that transferred $229 million of `illicit oil surcharges' to Iraqi-controlled accounts in Jordan, Lebanon, and the United Arab Emirates, notes the report, providing a list of payment transactions, most of which flowed through Geneva.

"Some of the movements of funds, such as large deposits followed quickly by similarly large withdrawals from the account, combined with other factors, including the identity of the recipient of the funds, are examples of possible money laundering behaviour perpetrated by some of the lesser known companies, which went undetected by the Bank," observes the Independent Inquiry Committee (www.iic-offp.org) headed by Volcker. We are bound to hear more about these payments, which are already threatening the credibility enjoyed by many companies and governments. Wonder if there is a way to safely escrow our trust in governance too?

ZeroBase@TheHindu.co.in

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