Bearer Bonds
What Is a Bearer Bond?
A bearer bond is a type of debt security issued with no named owner, and whoever holds the bond can claim the interest payments and principal. Bearer bonds can be issued by both governments and corporations. Bearer bonds, also known as “bearer securities” or “unregistered securities”, tend to be more expensive than registered bonds.
Bearer bonds were at one point mostly used by large institutions because they offer a higher degree of anonymity than registered bonds.
The main disadvantage of bearer bonds is that they are less secure than registered bonds. If the bond is lost or stolen, the holder has no way of proving ownership and may not be able to claim the interest payments or principal. Also, the bearer bonds’ lack of registration make them useful for money laundering, tax evasion, and other forms of financial crimes.
Bearer bonds were once very popular, but their use has declined basically to the point where they are no longer seen in the US market. This has been true in the US since 1982 due to the Tax Equity and Fiscal Responsibility Act of 1982.
Similar steps have been taken by most other governments around the world where bearer bonds were once common. Germany have for instance phased out bearer-style government debt and moved entirely to registered/book-entry systems, primarily via Deutsche Bundesbank and electronic settlement systems, and the UK eliminated government bearer bonds and required conversion to registered form following reforms under the Finance Act 2019. Today, sovereign nations are no longer issuing bearer bonds, and most jurisdictions have also clamped down on corporate bearer bonds.
The History of the Bearer Bond
Bearer bonds were issued by the US government and large corporations through the late-1800s through the mid-point of the 20th century, but eventually fell out of favor. Private investors were concerned about the potential vulnerability of the investment due to theft or loss, while many government disliked their association with money laundering and other underhanded financial activities. In the United States, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) imposed severe tax penalties on issuing bearer bonds, removed tax deductibility of interest for issuers, and made it economically impractical to issue them. New bearer bonds are not issued by the U.S. government.
On a related note, several jurisdictions allowed corporate bearer shares (shares owned by whoever physically holds the certificate) until fairly recently, before tightening transparency rules. Notable examples include Switzerland, Panama and Bahamas. Bearer shares were historically common in Swiss private companies, but reforms passed in 2019 (effective 2020) largely abolished bearer shares, and companies had to convert them into registered shares unless listed or structured as intermediated securities. Panama was long known for allowing bearer shares in offshore corporations, but 2013-2015 reforms changed the rules and bearer shares must now be held by authorized custodians to identify the beneficial owner. Bahamas previously permitted bearer shares for International Business Companies (IBCs), but immobilization with custodians and disclosure of beneficial ownership is now mandatory.
How U.S. Government Bonds Work Today
Owner names are recorded electronically and certificates are rarely issued. The holder’s name, Social Security number, and address are kept on file with the bond issuer.
When an investor wants to cash in a bond, he or she can do so by going through the process of redemption.
The investor contacts the issuer and requests that the bond be redeemed. The issuer then sends a check for the value of the bond to the named owner on file.
A registrar or transfer agent is responsible for keeping track of the entity of each registered owner of a stock or a bond. This is highly automated these days because of the sheer volume of transactions that take place daily.
The 2009 UBSA Legal Case Involving Bearer Bonds
In 2009, the bank UBS paid $780 million in penalties in a deferred prosecution agreement with the United States Department of Justice after it helped US citizens evade taxes using bearer bonds. The case involved UBS helping U.S. clients evade taxes by hiding assets in undeclared offshore accounts and using structures, including bearer instruments and secrecy laws, to conceal ownership from the Internal Revenue Service (IRS). The settlement became a major turning point in cracking down on offshore tax evasion and led to increased global financial transparency measures.
Summary – Bearer Bonds
Bearer bonds were once popular debt securities, but their use has all but disappeared in recent decades.
They were used mostly by large institutions because they offered more anonymity than registered bonds.
However, their lack of registration also made them vulnerable to theft, and they were also used for financial crimes.