04/01/2013 12:33 pm ET Updated Jun 01, 2013

Why UN Arms Negotiations Must Include Talk of Ending Corporate Secrecy

As United Nations representatives meet to hammer out a Global Arms Trade Treaty (ATT) in New York this week, they must take into account the role of corporate secrecy in facilitating illegal arms trafficking and other crimes around the world.

Addressing anonymous shell companies and hidden company ownership will be essential to successfully stemming the flow of illegal weapons around the world and protecting the innocent civilians who suffer from their proliferation.

On April 5, it will be one year since Viktor Bout, also known as the Merchant of Death, was sentenced to 25 years in prison, finally putting an end to his notorious career as a weapons trafficker. Bout was convicted on terrorism charges in the Southern District of New York, including conspiring to kill Americans and provide material support to terrorists.

The case served as an indictment of Bout's career as a gunrunner, fuelling conflict around the globe. The U.S. Department of Treasury described Bout's network as "one of the largest illicit arms-trafficking networks in the world" and submitted testimony to Congress stating that Bout "used U.S. shell companies to mask his ownership and facilitate his illegal arms trafficking activities."

Bout's use of shell companies, including at least 12 incorporated in Texas, Florida and Delaware, was integral to his arms trafficking because it allowed him to hide his identity behind anonymous companies created in the U.S. and abroad. Yet despite Bout's conviction, this loophole in U.S. law continues to be used by other sanctioned individuals, terrorists, corrupt dictators, drug traffickers, organised crime syndicates and tax evaders to legally hide their identities, access the U.S. financial system and launder dirty money.

Each year, approximately 2 million corporations are formed in the U.S. under state laws that often allow anonymous incorporation of companies. While some states require listing of shareholders, these can be other companies or "nominees" who serve as front people for the actual shareholder.

In many states, less information is collected from individuals seeking to incorporate than is required from people applying for a driver's licence or registering to vote (which explains how a recent World Bank report found that the U.S. was the favourite destination of corrupt politicians trying to set up such shell companies).

Corporate secrecy fundamentally undermines U.S. efforts to combat money laundering, tax evasion and global corruption. While the U.S. is a leader in the fight against financial crime and terrorist finance, the ability to incorporate anonymously enables criminals to misuse American companies to open bank accounts.

Once corrupt and other illicit funds are moved through an anonymous corporate vehicle into the financial system, they become much harder for law enforcement to track down. Global Witness' research has revealed that corrupt foreign politicians and pariah regimes such as Iran exploit the secrecy provided by anonymous American shell companies to access the US financial system.

Congress can close this loophole. The bipartisan Incorporation Transparency and Law Enforcement Assistance Act must be re-introduced by Senators Levin (D-MI) and Grassley (R-IA), and Congress must act swiftly to pass it. The bill would require companies to disclose information about the people who ultimately own or control them (often called the "beneficial owners").

There is a growing momentum in the U.S. and abroad to improve company ownership transparency and end anonymous shell companies. Prime Minister David Cameron has announced that he intends to use the UK presidency of the G8 to address this issue.

Now is the perfect time for Congress to end anonymous incorporation in the U.S. and for the Obama administration to act in concert with our international partners to end anonymous incorporation in all G8 countries, and around the world.

Putting Viktor Bout behind bars will not stop the next arms trafficker from taking advantage of the same loophole to send weapons around the world. We need to fix the system that enables illegal arms dealers and other felons to evade law enforcement and advance their criminal activities.

Stefanie Ostfeld is a Senior Policy Advisor with Global Witness and a member of the Task Force on Financial Integrity and Economic Development.

This blog was originally posted on al Jazeera.