Navigating the complex skies of aviation transactions requires more than technical knowledge; it demands meticulous attention to legal and regulatory details to avoid potential pitfalls. Comprehensive due diligence acts as the essential pre-flight checklist for any aircraft transaction, ensuring transparency and compliance at every stage.
Recognizing the critical importance of due diligence, the National Aircraft Finance Association (NAFA) hosted a webinar series on transactional integrity. This series, organized by NAFA's Transactional Integrity Working Group, educated members on the multifaceted risks that can arise during aircraft transactions. The webinars provided valuable resources and guidance to underscore that due diligence is not merely a legal formality but an important step in safeguarding the interests of all parties involved.
What is Due Diligence and Transactional Integrity?
Due diligence in aircraft transactions involves a comprehensive investigation to ensure all parts of a deal are transparent and compliant with legal and regulatory requirements. It's not just a legal formality; it's a critical step in protecting all parties involved in the transaction.
The primary goals of due diligence are:
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To ensure compliance with sanctions and regulations
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To mitigate risks (legal, financial, and reputational)
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To protect the careers and reputations of individuals and companies involved
Relying only on others to conduct due diligence is not a valid defense. Even when using third-party companies, it remains your responsibility to review and validate the information provided. The webinar emphasized that due diligence is not just a legal requirement but also an important step in protecting all parties involved in the transaction.
Starting the due diligence process
While every transaction carries some risk, a thorough due diligence process can help mitigate potential issues and provide peace of mind. A robust due diligence can also be used to show authorities you did your best in examining the transaction’s details.
A due diligence questionnaire is a critical tool and a good starting point. These forms should include comprehensive questions for clients to fulfill legal and financial requirements. Typical questions may include identifying the parties involved, the source of funds and the business type. Many templates are available online but can be customized to fit your requirements.
Here are steps to start your due diligence:
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Begin with a simple internet search to determine the aircraft's true ownership. This information is often available for free on FAA and DOT websites.
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Examine airworthiness restrictions and requirements.
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For international deals, evaluate import/export requirements and potential cross-border complications.
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Analyze operational control aspects, especially when clients intend to operate under Part 91. Ensure clients understand the differences between Part 91, 135 and 125 operations for larger aircraft.
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Screen to prevent illegal charters. The FAA website offers excellent guidance on defining and identifying illegal charter operations.
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From a DOT perspective, investigate potential common carriage issues by conducting internet searches on involved entities to detect unauthorized operations. Plane spotting resources can sometimes reveal concerns about aircraft operations.
An important step in the initial due diligence process is identifying the Ultimate Beneficial Owner (UBO). The new Corporate Transparency Act defines the UBO as individuals who directly or indirectly exercise substantial control over a company or directly or indirectly own a 25% or more interest. When designing due diligence questionnaires, it is essential to incorporate the U.S. government's guidance on customer information requirements outlined in the Corporate Transparency Act.
Additionally, perform a title search on the aircraft and read the reports. These can show any blemishes on the title. You can also rely on title companies to show details regarding foreign transactions.
Tips for Conducting Due Diligence
The webinar series provided several practical tips for conducting effective due diligence:
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Use multiple sources: Rely on various sources of information, including government databases, information searches and industry-specific tools. Some commonly used resources suggested by participants on the first NAFA webinar are listed at the end of this article.
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Verify information: Always independently verify the information through searches, collaboration and documentation.
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Stay updated: Consult legal experts and industry associations to stay abreast of changes in regulations and industry practices.
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Document everything: Maintain a comprehensive documentation trail to demonstrate compliance and due diligence efforts.
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Trust your instincts: If something feels off, investigate further. Red flags should not be ignored.
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Collaborate with others: Each party brings its own unique knowledge and experience, allowing them to spot potential red flags that others might miss.
Due diligence is not a one-time process but requires ongoing monitoring. Continuous screening and updating information, especially in long-term relationships with clients, is critical. This includes conducting periodic reviews and ensuring all information remains current and correct. While it may be impractical to perform manual searches daily, some retail programs offer automated ongoing screening functions that can help streamline the process.
Even if initial due diligence comes back clean, ongoing tracking and screening are essential. Professionals should be diligent and remain aware of last-minute changes to the parties involved, reevaluating the risk based on these changes. Updated searches should be conducted just before closing, even for repeat customers, as their information can change.
To make sure due diligence practices remain updated, professionals should work closely with their management teams, legal counsel and industry associations. Regularly reviewing practices and seeking advice from outside counsel can help identify necessary changes or new requirements.
Adequate and ongoing due diligence requires collaboration among all parties involved, including buyers, sellers, brokers, escrow agents and legal advisors. Each party has a role in making sure the transaction is conducted transparently and follows legal requirements. Technology can also be a tool for collaborative due diligence, including automated screening tools, databases for sanctions, watch lists and online resources.
Recognizing and Examining Red Flags
From the webinars, it was apparent that using your common sense to avoid potentially illegal aircraft transactions and facing red flags head-on is key in the due diligence process. If you see a red flag, you have a duty not to ignore it.
Some notable red flags include:
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Deals that seem too good to be true
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Attempts to skip crucial steps in the transaction process
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Multiple escrow agents or banks walking away from the deal
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Last-minute changes to payment details
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Unusual ownership structures or gaps in aircraft history
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Transactions involving unknown or unverified parties
Many aircraft transactions go through a third party, and not all are necessarily bad. However, it’s imperative not to take anything for granted.
A red flag doesn’t necessarily mean abandoning the deal, but it warrants further investigation and due diligence. By maintaining a curious and proactive approach, asking questions and verifying information through multiple sources, industry professionals can help mitigate the risks associated with bad actors in aircraft transactions.
Incorporating Regulations with Sanctioned Countries
Aircraft transactions are subject to complex regulatory frameworks, including sanctions on specific countries and export control measures. It is crucial for all parties involved to maintain a thorough understanding of applicable sanctions pertaining to their particular deal. Moreover, given the dynamic nature of international relations and regulations, constant vigilance is essential. Stakeholders must actively monitor and adapt to any changes in regulations or new guidance issued by relevant regulatory bodies to ensure ongoing compliance and mitigate potential risks.
Regularly track various lists maintained by the Office of Foreign Assets Control (OFAC) and the Department of Commerce to ensure compliance with sanctions and export controls. These lists include the Specially Designated Nationals and Blocked Persons (SDN) list, which prohibits U.S. persons from engaging in transactions with listed individuals and entities, and the Sectoral Sanctions Identifications (SSI) list, which targets specific sectors of the Russian economy. Export control lists, such as the Entity List, Denied Persons List and Unverified List, also play a role in identifying parties subject to restrictions.
Other tips to stay updated with sanctions include:
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Review commercial contract provisions. For sensitive jurisdictions, you may want to include a provision that states that doing business with the sanctioned or blacklisted party could result in a default.
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Consult issued government guidance.
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Review recently published OFAC compliance program guidance, which sets forth key components of an effective compliance program, including a commitment by management that concerns corporate culture/tone at the top.
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Review your customer profile, and try to understand what industries might be impacted by economic sanctions and which jurisdictions are the trickiest.
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Review your Customer Identification Program (CIP program). Identify and verify your customers, identify politically exposed persons, verify the source of wealth and conduct enhanced due diligence if warranted.
Balancing Due Diligence and Transaction Efficiency
Striking the right balance between thorough due diligence and maintaining transaction efficiency can be challenging. Clients can resist providing detailed information, mainly when dealing with high-net-worth individuals or entities from jurisdictions with limited transparency.
The panelists emphasized the importance of clear communication and education in addressing this challenge. By explaining the reasoning behind the information requests and highlighting the potential consequences of non-compliance, companies can help clients understand the necessity of due diligence and encourage their cooperation. The panelists also recommended establishing a consistent approach for all clients, regardless of their backgrounds, to ensure fairness and avoid any perception of discrimination.
Another strategy discussed during the webinar was conducting due diligence early in the transaction process, even before signing a letter of intent. By identifying potential issues early on, companies can save time and resources on transactions that may not be possible due to sanctions or export control concerns. This proactive approach also allows more time to address identified risks and seek necessary licenses or waivers, if applicable.
Conclusion
Conducting adequate due diligence in aircraft transactions is a complex and ongoing process that requires vigilance, attention to detail, and a willingness to ask tough questions. By following recommended practices and staying informed of regulatory changes, aviation finance industry professionals can mitigate legal and reputational risks while facilitating successful aircraft transactions.
Remember, NAFA's Transactional Integrity Working Group is always available to provide support and resources. For questions, fraud reporting or suggestions for future discussions, email nafa@fraud.aero.
By prioritizing due diligence and taking a proactive approach to risk management, we can collectively work towards maintaining the integrity of aircraft transactions in our industry.
Additional Resources
More about NAFA’s Transactional Integrity Group
The goals of NAFA's Transactional Integrity Working Group are to educate members about the risk of fraud, which can occur at any stage of a transaction, and provide resources that could help mitigate the risk and avenues to report it.
To further support transactional integrity, NAFA will continue to host its panel of best practices at its Annual Conferences and use the information the Working Group gathers to keep members apprised of the latest threats and help mitigate the perpetual risk of fraud.
We encourage member participation in this panel either by volunteering to be in the Working Group or submitting articles for monthly publication. Any and all input from the membership will be appreciated and will serve to help us all preserve the integrity of our aircraft transactions.
We recognize that many fraud-related issues contain sensitive information, so please be assured that any and all reported issues will be handled with the utmost confidence.
Webinar Series Sponsors and Panelists:
Due Diligence 101: Know Your Regulators
Sponsor: TVPX
Moderator: Jeff Towers, Vice President and General Counsel of TVPX
Panelists: Laura Martino, Associate General Counsel at Global Jet Capital and David Hernandez, Shareholder at Vedder Price
Tips for Avoiding Bad Actors in Aircraft Transactions
Sponsors: Holland and Knight and TVPX
Moderator: Shelley Svoren, CEO and Founder of Infinite Branches
Panelists: Zipporah Marmor, VP of Aircraft Transactions at ACASS and Jonathan Epstein, Partner at Holland & Knight
Tips for Conducting Due Diligence in Aircraft Transaction
Sponsors: Insured Aircraft Title Service (IATS) and TVPX
Moderator: Greg Luster from Insured Aircraft Title Service (IATS)
Panelists: Joan Roberts (IATS) and Lacey Perna (TVPX)
Navigating Russian Sanctions
Sponsors: TVPX and Lapayowker Jet Counsel P.A.
Moderator: Stewart Lapayowker, Founder of Lapayowker Jet Counsel P.A.
Panelists: Cassia Sant'Anna, Corporate Compliance Manager at Embraer, Caroline E. Brown, Partner at Crowell & Moring and Jeremy Iloulian, Counsel from Crowell & Moring.
For those interested in further information, the NAFA website offers a range of resources, including access to past webinars and detailed guides on various parts of aircraft transactions. Additionally, a list of due diligence information sources is listed below. The list is not all inclusive and is not intended to promote any particular product but describes some of the tools you may consider for performing due diligence.
What platforms do you use for due diligence?
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3rd party due diligence software
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CSC
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Descartes Systems Group - Visual Compliance
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Dow Jones - Customer Due Diligence (CDD) & Onboarding
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Export Controls & Sanctions Compliance Policy
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FAA
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Google
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Internal record keeping
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JETNET
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Kharon Research - Compliance and Financial Crimes Compliance
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Lexis Nexis Risk Solutions - Bridger Insight
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Lextegrity Compliance Data Analytics
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OFAC
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Online platforms
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Semaphore Intel
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Verafin - Financial Crim Management Solutions
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Wingform
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World Check
What resources do you look at to determine compliance with FAA regs?
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Aeronautical Center - Central Region Counsel (ACC) Opinions
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Aircraft attorney
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Aircraft Operator or Management Company
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ARG/US
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Asset Manager
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Digital Mx records
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Escrow
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FAA counsel
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FAA examiner handbook
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FAA Interpretations
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FAA.gov / FARS / Ch 14 Code of Federal Regulations (CFR) / Advisory circulars / Aeronautical Information Manual (AlM)
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Internal company resources
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JETNET
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Legal research plate forms
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Logbooks
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Screening providers
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Summit
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Title Companies
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Westlaw
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Wingform
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WorldCheck, Semaphore and internet searches
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Wyvern
Written and published by NAFA on September 12, 2024.