Why are bearer bonds illegal

Depository Trust likes the idea of being able to clear out its cluttered vaults so the rule is likely to lead to a phasing out of bearer bonds. The change gives people who desire the anonymity of bearer bonds little choice except to hold the bonds themselves, some analysts say.

Most bond buyers turn their securities over to their brokers, who in turn hold them in the Depository Trust or some other depository. Because of the anonymity factor as well as supply and demand, bearer bonds at one time commanded a premium price, analysts said.

But the reforms changed all that. However, many people prefer keeping their investments confidential, whether to conceal income from the IRS or for other reasons, so the new rule can be disquieting, analysts say.

However criminal enterprises discovered ways to exploit the anonymity of bearer bonds, including stealing them, so laws were enacted in the s that effectively eliminated their use in the United States.

All investments are inherently risky. Individuals risk their savings in order to grow the principle amount. A bond is like a loan to a company or government in exchange for a little profit, and the investor is generally looking for an interest rate higher than what can be earned in a savings account. Bearer bonds are particularly risky because they are not assigned to any individual, making them untraceable. This means that if the bond is stolen the person who holds it can cash it in without proof of ownership.

It was also impossible for the Internal Revenue Service to track income from such unregistered instruments, which is the backbone of tax collection. Bearer bonds always held the potential for fraud and abuse, but it took a significant incident for legislation to be enacted that would eliminate the financial tool due to the anonymity of holders. The Tax Evasion and Fiscal Responsibility Act cracked down on the use of bearer bonds, removing the features that made them attractive to buyers and sellers.

Most financial accounts can be traced and are assigned to an individual or business entity for good reasons: it allows unclaimed funds or abandoned accounts to be moved to a beneficiary or next of kin.

Bearer bonds are open to fraud and theft because they are neither assigned nor registered. If an unclaimed property search turns up a safe deposit box containing bearer bonds they may still be worth something if the company or government that issued them is still in existence. Some bearer bonds are only valuable to collectors as curiosities. The tax reform law TEFRA essentially eliminated the benefits of bearer bonds by ceasing the tax write off for companies that issued them and requiring a 10 percent withholding tax on dividends and interest paid to individuals without a tax identification number.

The latter provision made bearer bonds less anonymous. Another provision of the law excused companies from honoring bearer bonds that were issued decades before. In the U. Other countries and foreign companies may still issue them but these lack the protections that U. Every time a book-entry security is sold, a transfer agent or registrar changes the name of the registered owner.

Obviously, this system is highly automated or it would collapse. Bearer bonds are no longer issued by the U. Treasury, and those issued in the past have long since passed their maturity dates.

An individual can buy any amount of bearer bonds, submit the coupons for payment, and remain anonymous since the bonds are not registered in the owner's name.

Justice Department after the firm was accused of helping American citizens evade taxes using bearer bonds. The lack of bond registration offers little protection or recourse to investors if the physical certificate is stolen since the custodians do not have the name of the real owner on file.

Old bearer bonds issued by corporations may or may not have retained their face value, even if the maturity dates have long since expired. The finder of a corporate bearer bond can check for the name of the company that issued it and contact that company, if it still exists, or the company that bought it out, if it was taken over. The bearer bond may be honored. Most owners of bearer bonds keep the physical certificates in a safe deposit box at a bank or in a safe at home.

To redeem the bond at maturity, the bond needs to be delivered to a bank in person or by courier. Getting the interest payments is also problematic since the coupons can get lost in the mail. Bearer bonds can cause problems for the heirs of their owners. This can be avoided by attaching proper documentation to the owner's will. Department of Justice.

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