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Bearer bond

Bearer bond

A bearer bond is a fixed income security that is owned by the holder, or bearer, of the bond, rather than the registered owner. These types of bonds are no longer issued due to tax evasive and money laundering crimes.

Overview

A bearer bond is a fixed income security that is owned entirely by the holder, also known as the bearer, as opposed to the registered owner. These bonds are negotiable instruments which hold a stated maturity date as well as a coupon interest rate. Once a bond reaches its maturity, it cannot pay interest to the holder. The bonds must be redeemed in person or by a courier at a bank, as clipping coupons to receive interest on these bonds became an issue.

Issues with Bearer Bonds

Since bearer bonds could be purchased at large amounts, and submitted via coupon for payment anonymously, the bonds became unreliable as any holder would be allowed to tender the bond as they aren't registered under the original owner's name. This loophole allowed American citizens to evade taxes, particularly with a financial services company named UBS. The firm eventually agreed to a deferred prosecution agreement with the Justice Department and paid $780 million for assisting with criminal activities such as tax evasion.

United States Acts

Bearer bonds are no longer issued in the United States due to problems with money laundering and tax evasion crimes. The Tax Equity and Fiscal Responsibility Act of 1982 signified the end of the practice of issuing bearer bonds in the US. Other difficulties with bearer bonds include bond issuers failing to uphold obligations to pay interest and payment principals. In order for investors to collect these particular bonds, investors were forced to take legal action, which required the holder to surrender ownership anonymity. In Europe, companies can be issued "Eurobonds" which act as electronic bearer bonds.

History and Popular Culture

Some historical incidents with bearer bonds have been captured or created in famous literature pieces and films such as The Great Gatsby, Beverly Hills Cop, Die Hard, Heat, and also Panic Room. Historically, however, official use of bearer bonds go back to 1648, though they are suspected to have been in use long before that. In the United States, the popularity of bearer bonds grew during the Civil War since government resources were strained due to reconstruction costs. In the 1920's, German banks were known for issuing millions of dollars worth of bearer bonds to boost Germany's agricultural improvement efforts. These bonds were set to mature in 1958 and payable in New York, however, both interest and principal were never paid.

Bearer Bonds Today

Though bearer bonds can no longer be issued, there are still some in circulation that were issued while interest rates were higher. A law in 2010 in the United States allowed banks and brokerages to be relieved from the responsibilities to redeem the bonds.

Timeline

1982
The Tax Equity and Fiscal Responsibility Act of 1982 outlawed the new issuance of bearer bonds in the United States

Further Resources

Title
Author
Link
Type
Date

Bearer Bonds: Easy to Transfer, But Hard to Find

Web

Bearer Bonds: From Popular to Prohibited

Web

July 26, 2019

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