Bearer Instrument

A bearer instrument refers to an instrument that is payable to anyone possessing the instrument and is negotiable by transfer alone. It is a document that entitles the holder of the document rights of ownership or title to the underlying property, such as shares or bonds. It is a type of fixed-income security in which no ownership information is recorded and the security is issued in physical form to the purchaser. Unlike normally registered instruments, no record is kept of who owns bearer instruments or of transactions involving the transfer of ownership, enabling the owner, as well as a purchaser, to deal with the property anonymously. The holder is presumed to be the owner, and whoever is in possession of the physical bond is entitled to the coupon payments. Whoever physically holds the bearer document is assumed to be the owner of the property, and the rights arising therefrom, such as dividends. For example, shares and bonds are bearer instruments.

Bearer instruments are used especially by investors and corporate officers who wish to retain anonymity. These are used especially by investors and corporate officers who wish to retain anonymity, however, they are banned in some countries due to their potential use for abuse, such as tax evasion, illegal movement of funds, and money laundering. The OECD in a 2003 report concluded that the use of bearer shares is “perhaps the single most important (and perhaps the most widely used) mechanism” to protect the anonymity of a ship’s beneficial owner.

Bearer instruments can be employed in certain jurisdictions to avoid transfer taxes, in spite of the fact that taxes may be charged when bearer instruments are issued. Physically possessing a bearer share accords ownership of the corporation, which in turn owns the asset. There is no requirement for reporting the transfer of bearer shares, and not every jurisdiction requires that their serial numbers even be recorded. It is a negotiable instrument that is payable to “bearer” or to “cash” or to “the order of cash,” that is, not naming a payee, is a bearer instrument, and is called “bearer” paper.

Bearer instruments are distinct from normally registered instruments because with respect to a bearer instrument no records are kept of about the one who owns the instrument. However, ownership (or legal entitlement) is extremely difficult to establish in event of loss or theft. It is an instrument that is payable to the bearer or holder. In general, the legal situs of the property is where the instrument is located. Bearer instruments can be used in certain jurisdictions to avoid transfer taxes, although taxes may be charged when bearer instruments are issued.