The possibility of applying the interest rate for time deposits to the escrow account
Under the law, businesses operating in certain specific industries (e.g., labor leasing services, employment services, etc.) (Deposit-Holding Businesses) are required to deposit funds with a licensed bank in Vietnam (Deposit-Receiving Bank) prior to conducting such business activities (the Escrow Account). The Escrow Account is strictly regulated by law (for example, the Escrow Account may only be withdrawn or disbursed under specific circumstances with the approval of a government agency). The Escrow Account may have a long term (e.g., over one year); however, the law is not entirely clear on whether the Escrow Receiving Bank may establish the Escrow Account as a time deposit and apply the corresponding time deposit interest rate.
Arguments in favor
1.Although there are counterarguments as discussed below, it can reasonably be argued that the Escrow Bank may apply a term deposit interest rate to the Escrow Account if the parties agree to establish the Escrow Account as a term deposit. The reason is that:
a) Under the law, deposits may include, among other forms of deposits, demand deposits and time deposits. A time deposit is defined as a sum of money deposited by a customer at a financial institution for a specific term agreed upon between the customer and the financial institution, with the principle of full repayment of principal and interest to the customer.
b) According to Article 330.1 of the 2015 Civil Code, a security deposit is the act of a party obligated to deposit a sum of money, precious metals, gemstones, or negotiable instruments into a blocked account at a credit institution to secure the performance of an obligation. Therefore, a Security Deposit may be considered a deposit. However, to apply the interest rate for term deposits to a Security Deposit, the deposit term must be specified (e.g., less than 1 month, from 1 month to less than 6 months, or 6 months or more).
Legal regulations on the Escrow Account do not specify a deposit term for the Escrow Account but only list the cases in which the Escrow Account may be withdrawn. Nevertheless, these regulations still allow the Escrow Enterprise to be entitled to interest on the Escrow Account in accordance with an agreement with the Escrow Bank.
It could be argued that the parties may agree to set a specific term for the Escrow Account and apply the corresponding term deposit interest rate, provided that the Escrow Entity and the Escrow Bank comply with legal regulations regarding restrictions on the Escrow Account (for example, withdrawal of the Escrow Account is permitted only in certain cases specified by law and with the approval of the competent state authority).
c) Article 1.2 of Circular 04/2022 also stipulates that “for escrow funds deposited as time deposits at credit institutions or branches of foreign banks to secure the fulfillment of obligations under the law, the application of interest rates for early withdrawal of deposits shall be implemented in accordance with separate regulations issued by the Government and the State Bank of Vietnam…” This provision confirms that the Security Deposit may be deposited in the form of a time deposit.
d) Although not entirely clear, the State Bank of Vietnam also holds the view that the legal provisions on time deposits under Circular 49/2018 may be applied to the Security Deposit.
Counterarguments
- There is also an argument that applying a specific term to the Escrow Account is not permitted because:
a) under the law, the Security Deposit may be withdrawn under certain legal events (e.g., when a business has its license revoked, faces financial difficulties, or is unable to compensate employees). Therefore, the Escrow Account may be withdrawn at any time if an event specified by law occurs, and consequently, the term of the Escrow Account cannot be determined. Thus, the Escrow Account cannot be considered a time deposit; and
b) the Escrow Bank’s transfer of the Escrow Account from the escrow account to a time deposit account does not fall under the circumstances for withdrawing the Escrow Account as prescribed by law; therefore, this withdrawal and conversion into a time deposit do not comply with legal regulations on escrow.
Risk Assessment
- The risks mentioned in point 2 above are low because:
a) The law does not prohibit the parties from agreeing on a specific term for the escrow deposit during the period in which the Escrow Deposit is temporarily frozen by the bank, nor does it require the Escrow Bank to hold the Escrow Deposit in a fixed account. Therefore, as long as the bank can ensure the Escrow Amount remains frozen after being converted into a time deposit and the legal provisions regarding time deposits are complied with.
b) The risk of the Escrow Amount being withdrawn at any time under circumstances specified by law is similar to the risk associated with other time deposits if the customer wishes to withdraw the funds. In this case, Circular 04/2022 also clearly stipulates the interest rate for early withdrawal of time deposits (see 1.3).
c) The agreement on the term of the Escrow Account does not prevent the Escrow Agent from fulfilling obligations related to this Escrow Account (e.g., early withdrawal to fulfill indemnification obligations).
d) The cases of withdrawing the Escrow Fund as prescribed by law refer to cases where the Escrow Fund is withdrawn for use by the Escrow Entity, and this provision does not apply to cases where a bank conducts a transaction to place the Escrow Fund in a time deposit.
View the 2010 Law on Credit Institutions here
View Circular 07/2014/TT-NHNN here
View Circular 49/2018/TT-NHNN here
