SINGAPORE — The unfolding case of a missing sum of $33.2 million from Singapore-listed Allied Technologies has turned the spotlight on a little-understood and little-regulated type of account known as an escrow account. The money was being held in such an account at a legal firm before it disappeared.

Back in the 2000s, when runaway lawyers David Rasif and Zulkifli Mohd Amin took off with more than S$10 million each, there was no requirement for conveyancing funds in high-value property transactions to be held in special accounts provided by a third party.

The rules on this were significantly tightened in 2011, with a requirement for conveyancing accounts to involve a bank appointed by the Ministry of Law, in addition to a two-party signing process between lawyers on both sides of a sale.

But escrow accounts are not the same as conveyancing accounts and are not covered by those 2011 rules.

Indeed, escrow accounts are not the subject of extensive regulation. TODAY looks at how these niche arrangements work.

WHY DO ESCROW ARRANGEMENTS EXIST? 

A company can appoint an independent agent — law firm JLC Advisors in Allied Technologies’ case — to hold its monies in custody, pending, for instance the negotiation of a major property deal.

It is meant to keep the money safe, and at arm’s length from the negotiating parties, as talks proceed. When a deal is finalised, the funds can be paid as agreed.

Escrow arrangements and accounts can be used, according to conditions agreed upon, for a variety of complex transactions including:

• Joint ventures

• Mergers and acquisitions

• Project financing

• Capital raising

• Litigation settlement

• Private equity investments

• Delistings

• Divestments

• Initial public offerings

In practice, involving a third party not only helps with the payment of funds, it can also mitigate risks for both sides.

Ms Stefanie Yuen Thio, joint managing partner of TSMP Law Corporation, said that as an example, escrow accounts are useful if a lengthy delay is expected before a deal is completed, even when a seller and a buyer have signed their sale and purchase agreement.

In such cases, the seller may want to have some or all of the sale price money held by a secure third party, which would “carry out an important role to bridge the gap”, she said.

In a frequently asked questions' handout which was last updated in 2011, the Ministry of Law (MinLaw) also stated that lawyers may choose to operate an escrow account when dealing with complicated conveyancing transactions, such as collective sales or sales of a large commercial property with many tenants or owners.

THE ALLIED TECHNOLOGIES CASE 

The S$33.2 million paid out of Allied Technologies’ escrow account was done on the instructions of a senior lawyer at the law firm holding its account, JLC Advisors’ managing partner Jeffrey Ong Su Aun, who has since gone missing.

Allied Technologies received a letter from JLC Advisors stating that the instruction “might have been unauthorised”, after the company had repeatedly demanded the law firm repay the balance remaining in its escrow account since March. Investigations are ongoing.

The escrow agreement between Allied Technologies and JLC Advisors was struck in October 2017. It remains unclear what transactions the account was meant for, only that Allied Technologies' annual report for 2017 lends a clue that the monies could have arisen primarily from “share issuance from placement shares’’ and “the receipt of amount from Carapace”.

The report stated that these amounts “are non-interest bearing” and there are “no restrictions on the utilisation of these amounts”.

WHO VOUCHES FOR SAFETY OF ESCROW ACCOUNTS? 

Each escrow account is governed by the particular escrow agreement, which should state the terms and conditions on how the funds can be withdrawn. It typically comes as a formal binding document sealed by the buyer, seller and the law firm.

Unlike accounts dealing with conveyancing funds, no specific legislation deals with how an escrow account is to be operated.

Conveyancing accounts, covered by legislation, can be opened only with banks appointed by the MinLaw, such as DBS Bank, OCBC Bank and United Overseas Bank.

But lawyers can open an escrow account with any bank providing such services.

In its 2011 FAQ, MinLaw warned that parties should be mindful that escrow accounts are not regulated under the Legal Profession (Solicitors’ Accounts) Rules. It also noted that the Law Society has not drawn up any rules or guidelines governing the operation of escrow accounts.

ARE LAW FIRMS THE ONLY PARTIES TO HOLD YOUR MONEY?

No. Apart from lawyers, it is also possible to use banks as escrow agents or commercial escrow agents such as corporate services firm Hawksford, though they usually cost of a lot more, Ms Yuen-Thio noted.

Dealing directly with law firms managing a transaction can be convenient and cost-saving. Not all lawyers like the business though.

As a transactional lawyer who occasionally provides escrow services alongside handling the transaction, Ms Yuen-Thio told TODAY that she far prefers for the monies to be held by a separate party to reduce the risk and inconvenience for her firm.

THE DIFFERENT TYPES OF ACCOUNTS

Mr Eugene Thuraisingam, who leads Eugene Thuraisingam LLP, noted that clients are not required to deposit monies with their lawyers in the provision of general legal services, although some do for the sake of convenience and efficiency.

Such funds are put into individual law firms’ “client accounts”. Rules on this type of account require that every withdrawal of S$5,000 or more must be authorised by two solicitors in a firm.

This rule can be circumvented only when the law firm engages an independent bookkeeper to audit the firm’s accounts. In those cases, only withdrawals of S$30,000 or more require the two signatories.

Escrow accounts are technically also clients accounts and are subject to the same rules.

Conveyancing accounts were made compulsory only in August 2011 after the Conveyancing and Law of Property (Conveyancing) Rules came into effect. Such accounts are opened by law firms in the business of conveyancing — a process that typically requires lawyers to hold onto funds intended for using in exercising an option in the sale and purchase of properties.

To withdraw from conveyancing accounts, two lawyers, one acting for the seller and one for the purchaser of a property, must authorise the release of monies before the appointed bank can issue payment. Signatories must have at least three years’ experience and a current practising certificate.

Mr Alex Toh, a conveyancing lawyer with Withers KhattarWong LLP, told TODAY that as the lawyers who can authorise the release of the conveyancing monies are from different law firms, the risk of any potential collusion is minimised.

Before this two-party signing system was made mandatory, there was no need for the law firm acting for the buyer to approve the outgoing payment of funds in order for such monies to be released.

This was the loophole the runaway lawyer Rasif exploited to siphon his ill-gotten gains from a client account holding money entrusted to him by an American couple who wanted to buy a bungalow off Holland Road, Mr Toh noted.