What Are Bearer Bonds – Do They Still Exist?

Bearer bonds have made a significant impact on finance since their inception in the late 1800s.

They’ve offered unique benefits but also posed problems that raised regulatory eyebrows. While their existence today might seem outdated, are there still niche situations where these securities find their use?

In this guide, we are going to look at what bearer bonds are, their pros and cons, and if indeed they still exist.

What Are Bearer Bonds?

Bearer bonds are bonds or debt securities issued by a company or government entity. Rather than being registered to a particular owner, bearer bonds are issued without registering the name of the bond owner. Whoever physically holds or “bears” the paper bond certificate is considered the bond owner.

This differs from registered bonds, which record the owner’s name and require legal transfer of ownership. With bearer bonds, ownership transfers to whoever holds the physical bond certificate. The issuing entity is obligated to pay interest and repay the principal to whoever presents the coupons or the bond.

The key feature of bearer bonds is the anonymity they provide. The issuing entity does not record the bond buyer or subsequent owner names. Whoever physically possesses the bond is presumed to be the rightful owner able to redeem the coupons and principal. This makes bearer bonds more private and discreet compared to registered bonds.

History and Origins

Bearer bonds first emerged in the late 1800s as a way for companies to raise capital. At the time, stocks and bonds were still relatively new financial instruments. Bearer bonds allowed companies to issue bonds without having to register the owners. This made it easier and faster to issue bonds on a large scale.

The anonymity of bearer bonds also appealed to wealthy individuals who wanted to conceal their asset ownership. The bonds provided privacy and made it easy to transfer ownership. Early on, railroads and industrial corporations issued bearer bonds to help rapidly build out national infrastructure projects.

Bearer bonds quickly became popular with investors due to the lack of registration. There was no paperwork associated with buying or selling the bonds. The bearer, or physical holder of the bond certificates, was presumed to be the owner. This allowed the bonds to be traded more freely without burdensome administration.

Do Bearer Bonds Still Exist?

Since bearer bonds can be used for illegal activities, most major countries, including the United States, Canada, Australia, and many in the European Union, have phased out their issuance. 

Nonetheless, a few countries still allow new issuance in limited circumstances. For example, Switzerland allows bearer bonds for private placements, Austria permits issuance for bonds traded on a stock exchange, and Liechtenstein allows new issuance under strict conditions.

Bearer bonds can also be used legally in niche situations, such as European real estate developers issuing short-term bearer bonds to finance projects. Additionally, wealthy individuals may use bearer bonds to anonymize and protect assets, while some investors still prefer anonymity for privacy reasons.

Pros and Cons of Bearer Bonds

Pros

Besides anonymity, bearer bonds were easy to physically transfer between owners. Investors could directly exchange bond certificates without any administrative work required for re-registration. This enabled bearer bonds to be transferred quickly.

In addition, they had tax benefits. In some cases, the lack of a registered owner meant interest payments were not reported to tax authorities. Some investors used bearer bonds to avoid income and inheritance taxes by hiding ownership. However, increased regulation has reduced the ability to exploit bearer bonds for tax avoidance.

Cons

The most glaring issue is the ease with which bearer bonds can be stolen or lost. Whoever physically possesses a bearer bond instrument is presumed to be its owner, so there is no recourse if a bond is stolen.

The anonymity also makes bearer bonds useful for money laundering, tax evasion, and other illegal activities. Without being registered to a particular person, the transactions are untraceable.

For investors, bearer bonds offer almost no protections or rights. There is no registry of ownership and no way to recover lost or stolen bonds.

There are no certificates or account statements as proof of ownership, so investors must physically secure the paper. If a company or government entity defaults on a bearer bond repayment, the investor has little recourse because there is no record of who owns the bonds.

Regulations

Governments around the world have introduced regulations on bearer bonds due to concerns around anonymity and potential misuse. Some key regulations include:

Restrictions and Bans

Some countries, like the United States and Canada, have placed severe restrictions or outright bans on bearer bonds. The US Tax Equity and Fiscal Responsibility Act of 1982 prohibited the issuance of new bearer bonds effective in 1983, with some exceptions. Existing bearer bonds were required to be converted to registered bonds by 1985.

Reporting Requirements

Regulations often impose reporting requirements on financial institutions and investors to mitigate anonymity risks. For example, US banks are required to file Currency Transaction Reports for transactions involving bearer instruments over $10,000. The EU Savings Directive required member states to collect information on interest payments to EU residents holding bonds of other member states.

Measures to Prevent Misuse

To prevent criminal activities, regulations impose due diligence, record-keeping, and reporting obligations on those dealing with bearer bonds. Financial institutions may be required to identify and verify bondholders. There are also restrictions on transporting bearer bonds across borders.

Noteworthy Cases Involving Bearer Bonds

Whilst bearer bonds may seem like ancient relics in the modern financial landscape, there have been some noteworthy cases involving these securities that have garnered significant media attention.

A famous case involving bearer bonds took place in Italy in 2009, where two men were arrested while attempting to cross the Swiss border with $134 billion USD in purported U.S. bearer bonds.

However, it was later discovered that the bonds were counterfeit. The seizure highlighted the potential misuse of bearer bonds, despite the stringent regulations implemented globally to phase out such financial instruments.

Another case worth noting is Japan’s arrest of a senior member of the Yakuza crime syndicate in 2011 who allegedly used counterfeit bearer bonds. Once again, these incidents underscore the potential for bearer bonds to facilitate illegal activities.

It is also worth mentioning that bearer bonds also occasionally make headlines due to their role in famous heist stories.

For instance, the classic movie “Die Hard” features German terrorists who attempt to steal $640 million in bearer bonds. Such sensationalized depictions, while not entirely accurate, serve to underscore the allure and potential misuse of bearer bonds.

Final Thoughts

Although bearer bonds have largely fallen out of favor in modern times due to their potential for misuse, some countries still allow limited issuance in niche situations.

While these bonds can offer benefits such as privacy and ease of transfer, their association with criminal activities and lack of investor protections have led to a decline in their popularity.

As a result, it is unlikely that the use of bearer bonds will ever regain its prominence in the financial industry. Nevertheless, the historical context and intriguing cases surrounding bearer bonds make them an interesting topic of discussion amongst finance professionals.

Article Sources

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Wikipedia. (n.d.). Bearer bond. Retrieved from https://en.wikipedia.org/wiki/Bearer_bond/ 

Investopedia. (2023, November 9). Bearer Bond: Definition, How It Works, and Why They’re Valuable. Retrieved from https://www.investopedia.com/terms/b/bearer_bond.asp 

Vasilev, K. (2023). Bearer Bonds Explained: Unraveling The Complexities. Cbonds. Retrieved from https://cbonds.com/glossary/bearer-bonds/​