Proposed interest type: representing Bearer Shares

[siwhitehouse]

A bearer share is equity security wholly owned by the person or entity that holds the physical stock certificate. Over recent years there has been movement internationally to restrict their use and to prevent their misuse.

The Interpretive Note to Recommendation 24 of FATF guidance #35 (Oct, 2014) [pdf] requires countries to take measures to prevent the misuse of bearer shares and bearer share warrants, for example, by applying one or more of the following mechanisms:

• prohibiting them
• converting them into registered shares or share warrants (for example through dematerialisation)
• immobilising them by requiring them to be held with a regulated financial institution or professional intermediary, and/or
• requiring shareholders with a controlling interest to notify the company, and the company to record their identity

The immobilising of bearer shares has been implemented by many countries through the introduction of the custodian entity. The custodian 'captures' the physical share certificate and record the name and address of the bearer/owner. They also manage the transfer of bearer shares from one owner to another.

As such, the relationship between the beneficial owner and the custodian is akin to a registration service. There are no ownership-or-control rights accorded to the custodian, other than the responsibility to inform the declaring company of any changes in the ownership of the shares and/or the custodian who has captured the bearer shares.

BODS has a requirement to record the capture of the bearer share by the custodian for at least two reasons:

1. Although the introduction of the custodian role makes the use of bearer shares a lot less attractive to people wishing to own entities anonymously there will possibly be a long tail of bearer shares captured by custodians.

2. Corporate service providers have helped maintain their clients’ anonymity by, for instance, creating a foreign trust in another jurisdiction that does not require the beneficiary owners of those trusts to register with authorities. As a result, the trust becomes the registered beneficial owner of the bearer shares, while authorities remain unaware of the identity of the owner of the trust.

Noting that in #336 we are proposing to create a new entityType of agreement and that 'bearer-share' falls within its definition.

A model for structuring a custodian agreement is shown in the diagram below where Person 1, the Beneficial Owner, is the sole owner of bearer shares that give them a shareholding in Entity 1. Entity 2 is the custodian who captures the bearer shares and Agreement 1 is the capture of the beneficial owner's bearer shares by the custodian

[siwhitehouse]

I've updated the diagram above to include a bit more detail. Working through this has led me to consider the type of interest that the custodian entity has in the agreement.

In #329 @kd-ods has used 'other-influence-or-control' to represent a nominee shareholding, and that is a possible option here too.

My understanding is that the custodianship relationship is defined in law within a jurisdiction (whereas a nominee is appointed through a Declaration of Trust (or other confidential nominee agreement)). Because it is possible to understand the details of the custodianship relationship by checking the legislation in the relevant jurisdiction it feels worth adding 'custodianship' as an additional interest-type.

[StephenAbbott]

Noting here that the Financial Action Task Force (FATF) last week announced a series of proposed changes to Recommendation 24 which include amendments to paragraph 14 of the Interpretive Note relating to bearer shares.

This proposed changes came about as the result of an earlier public consultation where Open Ownership submitted this contribution.

In answer to this question on bearer shares - 14. Should issuance of new physical bearer shares without any traceability be prohibited? - Open Ownership wrote:

Yes. Bearer shares without any traceability form a significant loophole and vulnerability to global AML/CFT efforts as they are not possible to verify. As part of Open Ownership’s principle on verification, ownership types that are difficult or impossible to verify (i.e. bearer shares) should be prohibited.

Open Ownership has published a response to the latest proposals and will be submitting further thoughts to the newly-announced public consultation.

[kd-ods]

@siwhitehouse - to clarify what could go into the next BODS release. We could include 'custodian' or 'custodianship' as an interest type, but we're not going to be adding an 'agreement' entity type. So would we use the same modelling as in the original diagram here, but with an 'arrangement' instead of an 'agreement'?

[StephenAbbott]

For future reference, storing this 2013 privacy impact assessment from UK government of proposals to increase transparency about bearer shares and providing interesting quote below:

Analysis indicates that just over 1200 UK companies have issued bearer shares. From a total population of 3.19 million companies, this figure represents 0.04% of companies. The use of bearer shares is not therefore widespread – but it is problematic. By the very nature of bearer shares we cannot know how many shareholders own these, but we estimate there might be around 3000 bearer shareholders of UK companies.