Page 583 - IOM Law Society Rules Book

Bearer securities and other negotiable instruments

Securities instruments in bearer form consist of bearer bonds and bearer stock
certificates or “bearer shares”. As with registered securities, both of these
instruments are issued by a particular corporate entity in order to raise capital. The
difference between registered securities and securities in bearer form, among other
things, is the method of transfer. In the case of registered securities, the instrument is
issued to a particular individual, and the “owner” is recorded in a register maintained
by the issuing entity. In the case of securities in bearer form, the instrument is
issued; however, the owner is not recorded in a register. When registered securities
are transferred to a new owner, the new owner must be recorded in order for the
transfer to be valid. When bearer securities are transferred, since there is no register
of owners, the transfer takes place by the physical handing over of the bond or share
certificate.

Share certificates, whether in registered or bearer form represent equity within a
corporate entity, that is, they represent shareholdings or ownership of a particular
corporate entity. The number of shares owned by a person determines the degree of
control that such an individual may have over the legal entity that issued the shares.
In the case of registered shares, determining ownership is relatively straightforward,
as the record of ownership is maintained in the share register of the issuing entity.
Determining the ownership of bearer shares, in contrast, is not so easy since it
depends on who possesses or has physical control of the share certificates. The
obstacles to determining easily the ownership of bearer shares (and thus the ultimate
owner of the corporate entity that has issued such instruments) are a factor that has
been exploited by launderers to conceal or disguise true ownership of entities used in
some money laundering schemes.

With regard to bearer bonds, it should be noted that their use in laundering operations
has not yet been documented to the same extent as that of bearer shares. Because of
the nature of bearer bonds as debt instruments however, it is possible that their
anonymous transferability represents the chief characteristic that could be exploited
by launderers rather than an ability to conceal ownership.

TYPOLOGIES

Typology 1: Transferability of ownership

In general terms there are considerable potential risks of abuse of these securities by
launderers, primarily stemming from their ease of transfer and their utility in
concealing or disguising ownership of assets. In the case of bearer shares, it is
particularly this last characteristic that poses the greatest problem. Especially when
combined with excessive banking secrecy or other negative features, bearer shares
seem to offer a very effective method of hiding the links between a criminal proceeds
and the criminal himself.