A cash deposit is money deposited by an operator with a third party (e.g. in a bank account) and legally secured so that it can only be used for the intended purposes. This includes ‘escrow accounts’.
An escrow account is a sum of money deposited in a dedicated account with a third party, usually a financial institution, on account of an obligation owed by the regulated person to a regulator. The third party agrees to pay out the money according to the terms of the documentation establishing the account, usually directly to the regulator on presentation of specified documentation.
Cash deposits are generally used for foreseen liabilities such as closure, restoration and aftercare of a landfill or mine, but can also be used for other liabilities.
In certain circumstances, a regulator may consider allowing a licensee to build up the fund over an agreed period of time. While the fund is building up, the operator should put in place an appropriate alternative financial provision.
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ADVANTAGES |
DISADVANTAGES |
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✓ The regulator has immediate access on presentation of specified documentation. ✓ May be appropriate to cover longer periods of time than other financial securities. ✓The assets will not be affected by negative changes in the operator’s financial position or its insolvency or dissolution provided that the underlying instrument is drafted appropriately. ✓ Creates an incentive for operators to promptly progress closure, restoration and aftercare works to limit the amount of money required to be set aside. ✓ There is potential for the value of the fund to grow ahead of projections. |
X The associated money is not available to the operator for ordinary commercial purposes (e.g. for working capital or used to raise debt finance from a lender), although it may be released as and when the liability is addressed, e.g. through the complete of closure, restoration and aftercare works. X Domestic insolvency or winding up law could treat the deposits as properly belonging to the company and so undo the benefit of segregating them from the main body of the company’s assets. X If the deposit is gradually built up without additional financial provision to cover the gap until the full amount is deposited, there may be insufficient money in the event of unanticipated early closure. X The sufficiency of the amount of money deposited being reduced by inflation or risk to investments in it. |
Important considerations – financial institution guarantee
| Basic considerations |
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| Documentation |
The following documents are generally required:
Template documents can help ensure the key aspects are covered. |
| Documentation specification | Generally, the documents will specify the triggering event, that the regulator may make a demand in the case of a triggering event or insolvency or winding up, requirements in relation to reporting, notifications of cancellation/expiration and replacement and inflationary adjustment and specification that the regulator may require provision of alternative financial provision upon cancellation/expiration and how the deposit can be drawn down with reference to the cost profile of the operation. |
| Reporting and monitoring | This will include triggering events, developments that affect ability to ensure provision, withdrawals or demands, performance of the institution/fund/asset, environmental compliance, the level of the liability against the value of the financial provision, (for foreseen liabilities) restoration progress reports and reporting and monitoring of payments in |
| Enforcement |
A demand will be made on the financial provision if the triggering event arises.The regulator may need to take enforcement action in the event of declining financial health, value or performance or where the required reporting is not provided. The regulator will need to ensure that the scheduled payments into the deposit are being made and may need to act in the case of the declining financial health of the deposit/institution. |