Panama Papers reveal billions hidden in anonymous paper shares

The Panama Papers chronicle various complex, labyrinthine ways in which the world's wealthy tried to distance themselves from their money, but one of the most common is surprisingly simple: paper stock certificates.

That's right, like the ones your grandmother has under thebed along with the gold bullion in preparation for that proverbial rainy day. Except in the Panama Papers, their intended use was less rainy day, more cloud cover.

Unlike the registered sharesmost people are familiar with, which are logged in an electronic company register along with the name of the person who owns them, bearer shares are paper certificates that belong to whoever is holding them at the time literally. That makes it easy to conceal who exactlyowns a corporation and to transfer ownership.

It also makes the shares easy to lose.

German billionaireJoachimzuBaldernachwas reportedlyfrantic when he couldn't locate one of his bearer shares,according to theSueddeutscheZeitung, the German newspaper that received the trove of 11.5 million leaked files, from Panamanian corporate services firmMossackFonseca,that makes up the Panama Papers.

"Wherever he looked, whicheverdrawer, file or cabinet he opened, it was nowhere to be found,"the paper reported.

Ian Cameron, the late father of BritishPrime Minister David Cameron,reportedlyhad tocountstacks of papercertificates belonging tohundreds of investors in hisBahamas-based, Panama-incorporated offshore investment fundBlairmoreHoldingsto make sure all were accounted for. The fundkept more thantwomillionbearersharesina bank safe inNassau, with noofficial record of who owned them.

'Vulnerable to misuse'

While there are legitimate uses for bearer shares, such as passing on inheritance without the hassle ofthe probate process, avoiding administrative costsandmaintaining privacy for valid reasons such as risk to personal security, the high degreeof anonymity and the ease of transferability they allow "makes them vulnerable to misuse," an OECD report concluded as far back as 2001.

Pesme, World Bank Group

"Public authorities need to be able to have access to who owns and controls companies at any time so that if they want to make checks on whether the use of the company is legitimate, where the assets are and who controls them and whether the company itself or the controllers of the company pay their tax," says Jean Pesme, practice manager for financial systems and markets at the World Bank Group in Washington, D.C.

"That's where the tension with the bearer share comes in immediately because at every moment, you can transfer ownership just by giving the paper to your neighbour."

Bearer shares have existed in common and civil law jurisdictions for centuries, but it's only in the last 15 years or so that they've been identified as a favourite tool ofmoney launderers and tax evaders and targeted by those trying to stamp out those practices, such as the global Financial Action Task Force.

"There were so many instances where they came up in money laundering schemes that the risk balance changed, and that was the basis for policy action," Pesme said.

Common practice

It's a safe bet that anyone who set up a so-called international business company, or IBC, in one of the world's tax havens prior to the early 2000s had the option of issuingbearer shares.

In 2002, for example, virtually all of the 380,000 active IBCs operating in the British Virgin Islands had the power to issue bearer shares, according to the territory's Financial Services Commission.

Sharman,Centre for Governance and Public Policy,Griffith University

In its unravelling of the 214,000 shell companies MossackFonseca helped set up between1977 and 2015, the Guardian newspaper linked at least 700 U.K. properties, worth billions of dollars, to offshore companies owned through bearer shares.

"Until 10 or 15 years ago, almost all jurisdictions offered them both tax havens and 'normal' countries," said JasonSharman, deputy director for theCentre for Governance and Public Policyat Griffith University in Brisbane, Australia.

"From about 2003, 2005, tax havens came under a lot of pressure to get rid of bearer shares, and most of them either got rid of them or did a thing called immobilizing them, which kind of amounted to the same thing, but OECD countries did not come under similar pressure, so got rid of them a lot later."

Immobilizing bearer shares means storing them with a custodian usually a lawyer, a bankor corporate services firm who keeps a record of who ownsthem and any transfers of ownership. Some jurisdictions simply required all bearer shares to be converted to registered form.

As part of its investigation into the Panama Papers, the InternationalConsortium of Investigative Journalists found that, as offshore jurisdictions such as the British Virgin Islands and the Bahamas phased out bearer shares, Mossack Fonseca clients shifted their companies to Panama, where bearer shares were allowed up until the end of last year.

Bearer shares out of fashion

Today, most jurisdictions have outlawed bearer shares, but many OECD countries only did so recently. The U.K. and Switzerland banned them last year;Luxembourg and Ireland in 2014. Up until 2007, Wyoming and Nevada had no laws expressly barring bearer shares, which made the states a favoured destination for incorporating shell companies.

Canada's Business Corporations Act states that "shares of a corporation shall be in registered form," andin 2015, the federal government contemplated adding an"explicit ban on bearer instruments" but never did, which means bearer bonds, for example, are allowed. Some provincially incorporated companies, such as those in Nova Scotia, canissue bearer shares.

Panamagave corporations untilDec.31, 2015, toconvert all bearershares to registered shares or appoint a custodian.

"You can still issue bearer shares, but the point of doing so has disappeared because you can't actually keep them yourself," said Sharman.

In an interview with CBC News, the owner of a small law firm thatsets up offshore companies in Panama said about 80 per cent of the firm's700 active clients had bearer shares, and most have opted toconvert them to registered shares.

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Tracking down all those paper certificates can be a challenge, however, and most jurisdictions give companies about a year or two to make the change.

"I have a couple of clients they've never gotten back to me, and at some stage, they're going to completely freak out," said the Panamanian lawyer, who did not want to be identified.

She said most of her clients used bearer shares to hold real estatethey wantto be able to easily pass down to their children or sell for profit.

"In Panama, it's illegal for a foreigner to own beachfront property. The easiest way to get around that is the corporation owns the beachfront property, therefore it's a Panamanian owner, and a foreigner owns the shares of the corporation," she said.

Many legal ways to stay anonymous

These days, most big banks won't deal with bearer share companies or will insist on identifying the owner andtaking custody of the shares.

In his own field research, Sharman managed to set up several anonymous shell companies with bearer shares without ever having to prove his identity, but getting a corporate bank account without proper identificationproved more difficult.

"Bearer share companies have gotten less and less useful simply because you can't link them to a bank account anymore," he said.

There are still plenty of other ways to remain anonymous whenhiding wealth, however, including:

• Nominee shareholders anddirectors hired front men of sorts whorun your company on paper while you, the beneficial owner,retain control at adistance.
• Trusts, which are not as heavily regulated as corporations and afford greater anonymity bytransferring legal ownership to a trustee.
• Shelf companies. Dormant companies with inactive shareholders and directors bought "off the shelf"from a corporate service provider for as little as a few thousand dollars. Theyprovidea ready-made corporate structure, complete with a tax and credit history and in some cases a bank account. Often, the transfer of ownership is never officially registered, rendering it nearly impossible to track down the real owner.
• Tiered corporate structures. Setting up multiple, interconnected companies across several jurisdictions has proven effective at disguising ownership since unravelling the layers takes significant time, money and expertise.

These perfectly legal entities offer almost as much anonymity as bearer shares.

"At least," says Sharman,"until your offshore provider loses all its files."