IN a little-known section of the Jamaican Companies Act, provision exists for a company limited by shares, if authorised by its Articles, to issue a warrant stating that the bearer of the warrant is entitled to the shares specified.

A bearer instrument is a document that indicates that the bearer of the document has title to property, such as shares or bonds. Bearer instruments differ from normal registered instruments, in that no records are kept of who owns the underlying property, or of the transactions involving transfer of ownership. Whoever physically holds the bearer papers owns the property. This is useful for investors and corporate officers who wish to retain anonymity, but ownership is extremely difficult to recover in event of loss or theft.

The right of a company to issue bearer warrants or bearer shares is not by any means peculiar to Jamaica but many would be surprised at the international controversy which surrounds the concept today.

There are many respectable reasons for bearer securities such as bonds. As one writer says : “They are as good as cash so long as they are not counterfeit…Take a …note from your wallet, and you will find the words ‘I promise to pay the bearer on demand the sum of…'”. However, it is said that there are few respectable reasons for bearer shares because the only rationale for their being is to disguise the true ownership of a company.

A share warrant differs from a regular share certificate in the following ways: the bearer of the warrant is not entered into a register; the bearer of the warrant is entitled to the shares specified in the warrant; the shares were transferable by delivery of the warrant (and so it is not possible for anyone, including the company, to track transfers of ownership); a share warrant is a negotiable instrument and, if stolen and subsequently sold to a bona fide purchaser for value without notice of the theft, the purchaser could enforce against the company payment of coupons for dividends due in respect of the warrant; and coupons for dividends could be attached to the warrant (and, in such cases, the company would distribute dividends to the bearer of the warrant only when a physical coupon was presented).

The advantages of bearer shares include confidentiality, ease of dividend payments, simple delivery of bearer shares on death without the need for probate/succession procedures and easy assignment for corporate services providers.

The concept of bearer shares is, however, no longer being accepted as being harmless and one of the primary aims of the Global Forum on Transparency and Exchange of Information about Tax Purposes of the Organization for Economic Co-operation and Redevelopment (OECD), of which Jamaica is a member, is to have member states immobilise or abolish bearer shares completely.

The applicable standards published by the Global Forum in relation to the availability of company ownership information reads as follows:

“Jurisdictions should ensure that information is available to their competent authorities that identifies the owners of companies and any bodies corporate… Where jurisdictions permit the issuance of bearer shares they should have appropriate mechanisms in place that allow the owners of such shares to be identified. One possibility among others is a custodial arrangement with a recognised custodian or other similar arrangement to immobilise such shares.”

The relevant Financial Action Task Force (FATF) standard is from February 2012 and Recommendation 24, which reads in part:

“Countries should take measures to prevent the misuse of legal persons for money laundering or terrorist financing. Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities. In particular, countries that have legal persons that are able to issue bearer shares or bearer share warrants, or which allow nominee shareholders or nominee directors, should take effective measures to ensure that they are not misused for money laundering or terrorist financing (FATF 2012: 22).”

Whereas bearer shares facilitate anonymity, we live in an age where transparency is seen as an important weapon in the fight against international crime, and secrecy is recognised as the tool of tax dodgers, money-launderers and terrorists. Instruments such as bearer shares are seen as cloaking the movement of funds and assets which are hidden from regulators.

As a result of the stance adopted by the OECD, countries around the world have taken steps to immobilise or abolish bearer shares in order to comply with the Global Forum’s call for the disclosure of company ownership so that a jurisdiction’s competent authorities can have access to it if necessary. In principle, the OECD has specified three routes to obtain beneficial ownership information: (1) in the company registry, (2) via a corporate service provider, (3) or through strong law enforcement powers. The latter has been recognised as the least promising, in that no matter how sweeping are the investigative powers of law enforcement agencies, if no beneficial ownership information is collected when a company is established, there is simply nothing there to be seized, especially in the case of foreign customers.

Many jurisdictions have reacted with a sense of urgency to the Global Forum’s requirements. Some have abolished bearer shares completely. Some have amended their legislation to provide that all bearer shares must be recorded in the issuer’s register or deposited in a securities account with a financial institution. In this instance, bearer securities, which have not been converted by the given date, will be automatically converted into dematerialised form or into registered form. There is an absolute prohibition against the creation of new bearer shares.

It is the writer’s understanding that the Jamaican Companies Act is to be amended to provide appropriate mechanisms for the identification of owners of bearer shares.

Compliance worldwide, however, is not being achieved without considerable controversy. It has been said that many of the powerful industrialised countries who are drivers of the Global Forum have themselves been slow to facilitate transparency in their corporate legislation. One writer, Jason Sharman, says that, although bearer shares in the United States were abolished in 2007, this has not substantively improved the poor performance of the US in relation to OECD and FATF standards on beneficial ownership “which remains markedly inferior to the performance of Panama,” (one of the jurisdictions very often vilified in this regard).

Other writers have pointed out that secrecy lay at the heart of the attractiveness of the State of Delaware as the US capital for US incorporations and that is the reason why 285,000 or so businesses have the same legal address to accept service of legal documents, names, 1209 North Orange Street, Wilmington, Delaware (Derek Sambrook).

It is anticipated that the US Incorporation Transparency and Law Enforcement Assistance Act which will require the disclosure of the beneficial owners of corporations will go a far way in assuaging the cry of international hypocrisy.

With bearer shares about to be stripped bare in Jamaica, the business community will have to learn to welcome other changes brought by the sweeping international call for transparency.

Peter Goldson is a Partner at Myers, Fletcher & Gordon and is the head of the Firm’s Commercial Department. Peter may be contacted at peter.goldson@mfg.com .jm or through www.myersfletcher.com . This article is for general information purposes only and does not constitute legal advice.