How to buy and register shares if you're a budgerigar
MEET one of Australia's newest shareholders. There's not much to distinguish him from the 6million Australians who directly own shares on the ASX. He has a security holder reference number (SRN) and an account statement, issued by Computershare. He's a native Australian, and his first share purchase is in reputable listed company Downer EDI.
This shareholder even has a welcome letter from Downer EDI company secretary Stephen Mockett. But there is one significant feature - he's a budgerigar.
Using a technique that underworld figures, corrupt stockbrokers and shady day traders use to hide shareholdings from the Tax Office, market regulators and the police, BusinessDay controls one Downer EDI share in the name Mr Bud Gerigar.
Holding shares under false names can help in tax avoidance and money laundering. The extent of off-market transfers of shares to fake identities and the amount of tax revenue lost in Australia as a result remains a mystery.
Doing the transfer was a cinch. A Melbourne-based independent private client adviser - a former stockbroker who wants to be known only as "Leo" - did the transaction on BusinessDay's behalf.
Leo used the modus operandi of sharemarket registry bottom feeders, such as David Tweed, and identified a shareholder with a small holding, in this instance a single share in a listed Australian company.
Unlike Mr Tweed, who offers well below market value, Leo paid a generous $20 for one Downer EDI share that was trading at $4.70 at the time. After the owner provided an SRN, the Downer EDI share was transferred off-market into the name Bud Gerigar.
"It's that simple - fill in an off-market transfer form and lodge it with the share registry free of charge," Leo said. "No one ever checks it. They're just processed and put through."
To manage its share registry, Downer EDI uses Melbourne-based Computershare, the world's largest share registry service. Computershare holds at least 100 million shareholder accounts for more than 14,000 corporations around the world, and manages the share registries of 65% of the companies listed on the ASX.
Computershare transferred the Downer EDI share to Bud Gerigar even though the new name was a fake. In order to meet the "L+3" provisions governing the transfer of shares - which stipulate the transfer must be completed within three days of lodgement of paperwork - ownership was transferred within 48 hours. Paperwork and a new SRN arrived in the post four days later. By using an off-market transfer the share changed hands free of stamp duty charges or brokerage - yet another incentive for crime figures to use the unregulated transfer mechanism.
The only hurdle for the transaction was the mandatory use of a black pen - not blue or red. It seems transferring shares to a budgie is fine with the bureaucracy, as long as it's done in the correct colour ink.
Computershare's group regional manager for Australia, Mark Davis, said his company was aware of the loopholes in the off-market transfer laws.
Under current regulations, registries such as Computershare are unable to take steps to establish the identity of the transferee.
Mr Davis said the company was aware the loophole could be used to hide shares from the Tax Office. The company has lobbied for more than a year for the Government, Treasury and regulators to have more stringent regulations introduced.
"Computershare has been aware of deficiencies in the off-market transfer space and has actively raised the issues that it is concerned about with the relevant regulators and has been encouraged by the response that it has received," Mr Davis said.
"We are very hopeful that the appropriate regulatory changes, in particular to the corporations regulations, will be made in the near term."
According to Leo, thousands of shareholdings in Australian companies are held in false names. "I know of one person who had shares held in the name of his dog," he said. Another stockbroker, with leading firm Patersons, told BusinessDay: "There was an instance a few years back when it appeared that a listed Australian company had a cat as among its top-20 shareholders for a time."
Those who manipulate gaps in the law and flaws in the checks and balances of share registry companies such as Computershare can create a paper trail of false identities that would take years to unravel.
It is now possible for BusinessDay to transfer Bud Gerigar's share into other false names, pretty much on a weekly basis.
"The point of it all is, in this case it's one Downer EDI share," said Leo. "It could easily be 20,000 BHP or 10,000 Commonwealth Bank shares held in a false name. Most likely it's a couple of million options that have been granted in some penny dreadful mining explorer."
According to Leo, even the cashing of dividend cheques for Bud Gerigar is not a problem - all that needs to be done is for a trust to be set up, which costs as little as $400.
"You could set up the Bud Gerigar trust, establish a bank account in that name, and any cheques to Bud Gerigar can be presented," said Leo. "The point is, crooks don't use such stupid names. They use common ones, and the rort has been going for so many years there are bank accounts held in names of people who just don't exist."
The technique can also be used for more sinister purposes. For an initial public offering of a company to be successful, it is a listing requirement that a spread of 400 different shareholders exist on the initial register.
Some companies struggle to meet this requirement. Others have to issue more stock than they would otherwise like to smaller shareholders.
To get around this, companies have been known to issue shares in false names. "The whole IPO spread requirement is the easiest to get around and to rort," Leo said. "If a company is short of 400 names, a sophisticated investor may well approach them and offer to take a parcel of shares, and will agree agree to provide 100 or so different names for that holding to be split among."
The use of trusts with false names linked to them can also be used to circumvent Australia's T+3 settlement rule - that payment for shares purchased must be completed within three days.
"You simply transfer the holding using an off-market form with the registry every three days," Leo said. "Using this technique, a shareholding can be controlled and held, but not settled, for months on end. I have seen stockbrokers use this if the share price of a company they have bought collapses. They just keep spinning the shares through off-market transfers until the share price climbs again. I had 600,000 shares in one listed company unsettled for months. I could vote them, but I hadn't actually paid my own money for them."
ASX spokesman Matthew Gibbs conceded that a gap in Australia's regulations seemed to exist.
"Shares in false names is not as issue that has been raised with ASX," Mr Gibbs said. "We do not validate the details of shareholders.
"It's probably something the companies do. The requirements for keeping registers are prescribed in the corporations law.
"There are now explicit ASX rules covering this, and it might be an area in the broker-client relationship that is covered by the Corporations Act."
In August, the Minister for Superannuation and Corporate Law, Nick Sherry, visited the US to announce a mutual recognition arrangement between the US Securities and Exchange Commission and Australia. It allows Australians to buy US shares and vice versa.
At the time, Senator Sherry said Australia was selected by the US "on the basis of the quality of our regulation".
"They (the SEC) have recognised that Australia does have a reliable regulatory framework in securities trading such that the US will recognise Australia's robustness and regulatory oversight," he said.
A spokeswoman for Senator Sherry said: "Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, it is an offence to provide false or misleading information to a reporting entity.
"In regards to the avoidance of tax, this would only occur if the shareholder illegally decides not to declare any gains."