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General Corporate

Services as an Escrow Agent by Law Firms and Attorneys

General Corporate

Services as an Escrow Agent by Law Firms and Attorneys

Escrow is a mechanism that ensures the safety of transactions by involving a third party between the seller and the buyer. In other words, for example,

  1. The buyer sends the payment to the seller
  2. The seller ships the product to the buyer

In this order, the buyer runs the risk of not receiving the product shipment even after sending the payment. By involving an escrow agent,

  1. The buyer sends the payment to the escrow agent
  2. The seller ships the product after receiving notification of payment receipt from the escrow agent
  3. The buyer confirms the product and notifies the escrow agent of receipt
  4. The escrow agent sends the payment to the seller

With this mechanism, the buyer can avoid the above risk.

While it is common for trust banks to serve as such escrow agents, it is also possible for lawyers and law firms to fulfill this function under certain conditions.

Overview of Escrow and Its Position in Japanese Legal System

Escrow is said to have originated in the mid-20th century in the United States as a system for securing real estate transactions.

In Japan, there is no law specifically regulating ‘escrow services’. Instead, existing legal systems are utilized to aim for the realization of the functions and reliability assurance of the above-mentioned escrow agent. The most commonly used service is the escrow service using the trust mechanism, and trust companies and trust banks are providing these escrow services.

When trying to provide escrow services in Japan, the following laws become relevant:

  • Capital Subscription Law: It is generally prohibited for anyone not specifically permitted by other laws to ‘conduct deposit-taking as a business’
  • Banking Act: It is prohibited for non-banking businesses to conduct foreign exchange transactions (so-called remittance business)
  • Funds Settlement Act: Even for non-banking entities, if the remittance is less than 1 million yen per transaction, it is possible to conduct foreign exchange transactions by registering

Due to the above legal regulations, as mentioned earlier, schemes using trusts by trust companies and trust banks have become common.

Furthermore, platforms that mediate sales between general users, such as Yahoo Auctions and Mercari, often use the mechanism of the Funds Settlement Act to conduct escrow services for ‘less than 1 million yen per transaction’.

Escrow Services by Law Firms and Lawyers

There are situations, such as high-value transactions that cannot wait for the opening of accounts with trust companies or trust banks, where there is a need for reliable lawyers or law firms to function as escrow agents. This is because lawyers have a unique type of bank account called a “trust account”, where they can hold client funds and transfer them as per the client’s instructions.

Furthermore, lawyers can hold funds for the “duties” they have been commissioned to perform. Therefore, they can:

  1. Be commissioned by the buyer to perform “duties” such as contract negotiation for real estate transactions
  2. Hold funds for the purpose of these “duties”
  3. Transfer these funds according to the client’s instructions at certain times during the performance of their duties, such as after contract negotiation

While they cannot accept requests solely for fund transfers like a pure escrow agent, they can:

  • Accept requests for their duties as a lawyer (such as contract negotiation for real estate transactions)
  • Perform fund transfers “also” as part of their “duties as a lawyer”
  • Receive compensation for their “duties as a lawyer”

This is the general process.

  • Lawyers are legally allowed (or rather, required) to open “trust accounts”, which makes it legal in relation to the provisions of the Capital Investment Law
  • Transfers made by lawyers are not foreign exchange transactions but transfers made as agents, making it legal in relation to the Banking Law and the Funds Settlement Law

Therefore, law firms and lawyers can legally perform “escrow agent (or similar) services” in the manner described above.

Services Provided by Our Firm

Escrow services provided by law firms and attorneys, as mentioned above, can only be offered as part of legal services such as contract negotiation. Our firm handles a wide range of tasks related to various businesses, including the creation and review of contracts, and contract negotiation.

Areas of practice at Monolith Law Office: Contract Creation & Review, etc. [ja]

Managing Attorney: Toki Kawase

The Editor in Chief: Managing Attorney: Toki Kawase

An expert in IT-related legal affairs in Japan who established MONOLITH LAW OFFICE and serves as its managing attorney. Formerly an IT engineer, he has been involved in the management of IT companies. Served as legal counsel to more than 100 companies, ranging from top-tier organizations to seed-stage Startups.

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