Trust Accounts – When does ‘Trust’ really mean trust Part 1

Recently the following article was published in Window on Phuket, the online link for which is http://www.windowonphuket.com/features_property_phuket/legal-matters-trust-accounts.htm

Trust Accounts, Deposits, Reservations, Purchase Monies and Sales Proceeds Keeping your monies safe – When does “Trust” really mean Trust?

In real estate transactions, but also in other transactions in Thailand, clients often place trust in their advisers, or a third party to take care of their monies pending completion of a transaction on a premise that they believe − or may have been led to believe − that their monies are ‘safe’. However, the true legal position in Thailand is not the same as many other jurisdictions that foreign clients, or Thai clients overseas, may be used to.
Examples of where the placing of monies in an adviser or other third party’s account may be where a client wishes to place a ‘deposit’ on a property, or wishes to bring monies into Thailand for a purchase, but does not have a bank account in Thailand, which is not unusual for many transactions involving foreigners, or wishes to make ‘staged payments’ to a contractor building a property − or simply wishes to use the account before splitting the monies to be paid to several different parties.
All clients should heed warnings on simply trusting their advisers or third parties with monies, in perhaps a mistaken belief that the monies are subject to specific regulation or safeguards. Many times it is simply the health and trustworthiness of the third party that governs the safety of the monies, and not any overriding protective legislation.

Real Escrow v Fake Escrow

Escrow is a word that is so wide in its potential meaning that it can be used with the effect of misleading clients with regards to the legal status of their monies.

In Thailand, there is an Escrow Act of 2008, which in relation to real estate transactions was updated through ‘notification’ to clarify procedures relating to land. To use ‘real’ escrow in Thailand for a real estate transaction:

1. A licensed Escrow Agent must be appointed

This costs the parties additional monies in terms of transaction fees, and the only potential licensed agents appear to be financial institutions (i.e. banks) whose procedures are generally not known for speed in relation to what may be a time sensitive real estate transaction.

2. The Land Office must be notified

If the transaction involves the Land Office, then it must be notified of the transaction so that it does not transfer or register an interest, other than as specified under the Escrow Agreement. However, the Land Office has to ‘consult’ with the escrow agent and review the agreement. The potential issue here is that even if a transaction has been agreed, the Land Office could object or be unable to commit to interpreting a provision of the Escrow Agreement.
The potential solutions to these issues are:

(a) place monies under a different legal regime in another country. Use the escrow mechanisms of that regime to govern release and receipt of the monies.

(b) structure the transaction so that deposit monies and balance are paid on the same day. This is not always convenient or practical in a deal where properties need to be secured or taken off the market.

Law Firms; Lawyers; Advisory and Consultancy Companies’ Regulation

In many jurisdictions, business people are used to a regime applying to their law firms or advisory and consulting firms relating to a ‘client account’. Client monies are placed in a ‘Client Account’ or ‘Trust Account’ which a governing body in that jurisdiction, such as a Law Society, regularly inspect and check for discrepancies. Even a mistaken transfer of a small sum of monies from a client account to an operational account can result in quite severe sanctions for lawyers and law firms. This provides clients with a security blanket of trust when depositing monies into law firm’s trust accounts.

In Thailand, Thai lawyers are subject to the rules of the Law Society of Thailand too, in addition to general law such as anti-corruption rules and other quite detailed provisions. Many firms, however, are not set up in a way where their bank accounts are inspected, audited or subject to any scrutiny at all in relation to the matter of client monies.

There are, of course, many exceptions to this rule, as some of the larger international firms have quite complicated, international methods of dealing with client monies in accordance with their global brand standards and practices. Other smaller firms may have IT systems and accounting systems, which are cleverly designed to ensure client monies are placed in a protected and transparent account. Some clients may, therefore, have only the ‘word’ or assurance of a firm that, if monies are placed into the firm’s account, they are safe. Any use of the word ‘trust’ must be interpreted as ‘trust on word’ as there is no Trust Law regime in Thailand. Once monies are in another person’s bank account, the monies belong to the bank but are subject to the call of the named person or entity that owns the account.

To be continued next issue with Trust Accounts, Deposits, Reservations…