Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Oh, the things you can learn from the Panama Papers. Did you know that documenting ownership of a shell company through bearer stocks is even a real thing?

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Image courtesy of DollarPhotoClub.com

Image courtesy of DollarPhotoClub.com

Yes, it is actually possible to organize your offshore company with the ownership documented with bearer stocks. Join me as I dive into the fine details of a WSJ article.

4/6 – Wall Street Journal – Panama Papers: Hiding Cash Has Become Crummy Business – Even Switzerland has joined the crackdown on hiding money. Prosecutors there leaked information on the Malaysian scandal. That’s a whole other story that I won’t go into. The point is Swiss prosecutors are going after money launderers and embezzlers. Swiss prosecutors.  You know, from Switzerland. Land-of-the-numbered-account Switzerland.

More detail from the article:

The offshore “business” has been shrinking for a long time. Article says the firm of Mossack Fonseca & Co saw a two-thirds decline in the number of companies they incorporated between 2005 and 2015, dropping from 13,287 to 4,341 in a decade.

Article says the Panama Papers say the law firm’s clients have incorporated 16,323 companies over the last three years but have closed up 28,777 in the same time. That’s a net shrinkage of over 12,000.

The company represented around 6,000 businesses in 2005 whose ownership was evidenced using bearer shares. Currently they represent 170. That’s a drop of 97% in a decade in the number of clients using bearer shares.

Bearer shares. Did you know that was even a thing? Before I get to that, let me describe bearer bonds.

Bearer bonds

Do you remember bearer bonds?

A long time ago, like back in the ancient days when I got into public accounting, many bonds were issued in bearer form.

Whether registered or in bearer form, many bonds had physical coupons attached for each one of the interest payments. For example, there would be 40 coupons attached for a bond providing semi-annual interest payments over 20 years.

You had to cut off each coupon about the date the payments are due, take the coupon to your bank, who would in turn submit the coupon to the issuing company, who would then remit payment to the bank, who would then deposit the interest payment in your account.

Bearer bonds were owned by whoever had physical custody of them. If you have them in your possession then the issuer will pay you when the bond matures. Likewise, whoever has physical custody of the coupons will be paid at the scheduled dates.

When I got into public accounting, the firm I worked for (codeword for those who really care: Uncle Arthur) had a bank client who was the fiscal agent for the state. That meant the bonds owned by the state were in a safe deposit box in the vault. Periodically the staff would pull the bonds out of the vault, clip the coupons, and submit them to the issuing companies.

One of the implications for auditors is the need to physically inventory the bonds to make sure the bearer bonds were present as well as the registered bonds. Have to make sure the coupons were still attached, too.

More ancient history – the exquisitely high liquidity of coupons and bearer bonds made it critical to get a written release when you finished an inventory count of the bonds. To prevent the possibility of being blamed for the misplacement of a coupon or bearer bond it was imperative to get a written release at the end of inventory which said something like “all securities counted by auditor John Doe were returned to me intact”, and file that release in the workpapers.

Do you get the picture of what bearer bonds were like?

Now carry over that concept to bearer stocks.

Bearer stocks

The news to me is you can conduct business in the Caribbean with a company whose ownership is evidenced by bearer stocks. Whoever has physical custody of the stock certificate owns the shares.

This does several things. It makes ownership of the company absolutely anonymous. You could have a buddy, or a nominee, or your law firm form the company which is an empty shell. An enterprising young buck could even form a bunch of shell companies and sell the bearer shares to anyone who wants a traceless shell.

The bearer shares are handed over to you at which point there is no record of the new owners. You can then move your ill-gotten gains into the company.

Second issue is this also makes tracking subsequent ownership changes impossible.

Think about really serious money laundering for bribery and corruption. Picture forming a company with bearer shares. You park $1 million or $100 million in the shell. Then you hand me the shares to bribe me to do something you want. There is literally no trail of any sort to be followed. There is absolutely nothing to show you giving me the money.

Bearer shares would be a phenomenal tool to launder money.

Amazing the things that exist. It is possible for me to wrap my little brain around the idea of bearer bonds. My little brain is far too small to have ever imagined the concept of bearer stocks.

Oh, the things you can learn.

Written by Jim Ulvog

April 7, 2016, 6:19 am at 6:19 am

Posted in Fraud, Other stuff

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  1. […] I previously discussed Oh, the things you can learn from the Panama Papers. Did you know that documenting ownership of a sh… […]


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