Transactional Integrity

The aviation industry is subject to a myriad of regulations enforced by various agencies, each with its own set of rules and requirements. From economic sanctions and anti-money laundering laws to aviation-specific regulations and export controls, the web of compliance obligations can be challenging. Understanding the regulatory landscape is a critical first step in the due diligence process when conducting an aircraft transaction.  

A comprehensive knowledge of these regulators and their mandates is essential for anyone involved in aircraft financing transactions. Industry professionals can better navigate potential pitfalls and mitigate risks by understanding key agencies such as OFAC, FinCEN, the FAA and others. This foundational understanding helps avoid costly penalties and reputational damage and enables stronger due diligence processes throughout the lifecycle of aircraft financing deals. 

The National Aircraft Finance Association (NAFA) hosted a webinar titled "Due Diligence 101: Know Your Regulators" to provide education and networking opportunities for members in the business aviation financing industry. The event was organized by the NAFA subcommittee for transaction integrity, chaired by David Vandenberg, and sponsored by TVPX. 

Jeff Towers, Vice President and General Counsel of TVPX, moderated the webinar, which featured expert speakers Laura Martino, Associate General Counsel at Global Jet Capital, and David Hernandez, a Shareholder at Vedder Price. The goal was to offer continuing education on due diligence practices, making it accessible to all levels of employees within member companies. 

Know Your Regulators 

Several key regulatory agencies impact the business aviation financing industry, including: 

1. Office of Foreign Asset Control (OFAC) 
2. Financial Crimes Enforcement Network (FinCEN)  
3. Securities and Exchange Commission (SEC) and the Department of Justice (DOJ)
4. Federal Aviation Administration (FAA) and Department of Transportation (DOT) 
5. Bureau of Industry and Security (BIS) 
6. Customs/Census
7. Directorate of Defense Trade Controls (DDTC) & International Traffic in Arms Regulations (ITAR) 
    

Office of Foreign Asset Control (OFAC) 

As part of the U.S. Department of Treasury, OFAC enforces economic sanctions against individuals and countries that threaten national security or undermine U.S. foreign policy. Laura Martino provided an in-depth overview of OFAC's role and functions, explaining that its legal authority derives from legislation such as the Trading with the Enemies Act and the International Emergency Economic Powers Act. 

Martino outlined the sanctions OFAC enforces, including country sanctions targeting specific nations like Cuba, Iran, North Korea, Syria and Crimea, and list-based sanctions targeting individuals and groups known as Specially Designated Nationals (SDNs). 

Key developments in economic sanctions include: 

• Increased complexity and enforcement actions
• Higher penalty amounts 
• Expanded scope covering non-listed parties outside sanctioned countries 
• Strict liability for violations 

To help attendees navigate this complex landscape, Martino offered practical tips for compliance, such as reading and understanding executive orders related to sanctions, reviewing OFAC guidance and advisories, implementing robust compliance programs based on OFAC guidelines, conducting thorough due diligence on counterparties and customers, and considering the inclusion of sanctions-related provisions in commercial contracts. 

Financial Crimes Enforcement Network (FinCEN)  

The Financial Crimes Enforcement Network (FinCEN) is another bureau within the U.S. Department of Treasury. FinCEN's mandate centers on combating money laundering, terrorist financing and other financial crimes. Money laundering is the concealing of sources or proceeds of illegal conduct by integrating them into legitimate financial systems. 

The key regulatory frameworks in this area include the Bank Secrecy Act, which applies to covered financial institutions, and the Money Laundering Control Act, which broadly prohibits the acceptance of proceeds from illegal activities. The USA PATRIOT Act also includes enhanced due diligence requirements for financial institutions. 

Recent developments in anti-money laundering show an increased focus on ultimate beneficial ownership (UBO) information. Martino detailed the Customer Due Diligence Rule of 2016, which requires certain financial institutions to collect UBO information, and the more recent Corporate Transparency Act, which mandates companies to report their UBO information to FinCEN. 

Securities and Exchange Commission (SEC) and Department of Justice (DOJ) 

The Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) share jurisdiction over the enforcement of anti-bribery laws, particularly the Foreign Corrupt Practices Act (FCPA). The FCPA prohibits companies from bribing foreign government officials for business advantages. Martino highlighted major risk areas such as third-party intermediaries and gifts to politically exposed people.  

Federal Aviation Administration (FAA) and Department of Transportation (DOT) 

David Hernandez provided insights into the Federal Aviation Administration (FAA) and the Department of Transportation (DOT) regulatory agencies. He outlined basic checks when approaching a new aircraft transaction, beginning with examining the basics of FAA and DOT.  

Hernandez suggests verifying the true ownership of the aircraft and investigating its operational history with information readily available on the FAA and DOT websites, including any potential illegal operations or Part 135 status. Also, review the basic registration requirements for buy-side transactions to determine future ownership. 

Factors to review from the FAA and DOT ownership information include: 

1. For cross-border transactions, conduct title searches. Rely on title companies to help with this process. 
2. Examine title reports for any blemishes to identify potential issues well before closing. 
3. Review airworthiness restrictions and requirements, paying close attention to any certificate of airworthiness related issues. 
4. For international deals, evaluate import/export requirements and potential cross-border complications. 
5. Analyze the operational control aspect, mainly when clients express intent to operate under Part 91, ensuring a clear understanding of the differences between Part 91, 135 and 125 operations for larger aircraft. 
6. Focus on truth in leasing requirements, which is important in preventing illegal charters. The FAA website offers excellent guidance on defining and identifying illegal charter operations. 
7. 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.

This comprehensive approach helps ensure a thorough understanding of the aircraft's status and potential regulatory issues before moving forward with the transaction. 

The Bureau of Industry and Security (BIS), U.S. Customs and Border Protection and the U.S. Census Bureau 

Understanding customs exports is indispensable for aircraft transactions involving international movements. This area of law is complex and dense and requires careful consideration and often professional expertise. There are two primary categories of exports to be aware of: permanent exports and temporary exports, with the majority falling into the permanent category. 

Three key regulatory agencies oversee the customs export process: the U.S. Customs and Border Protection, the U.S. Census Bureau and the Bureau of Industry and Security (BIS). Each plays an important role in the export process, and all have the potential to become involved if complications arise. As part of your due diligence, it's essential to obtain an end-user certificate when necessary and to understand that these agencies could take an interest in the transaction if issues occur.  

A customs export differs significantly from an export certificate of airworthiness (CA) or an FAA export. An aircraft can remain on the U.S. registry while requiring a customs export process. Due to the intricacies involved, it's often advisable to seek the help of a professional customs broker specializing in these matters. These experts can navigate the complexities and help avoid potential issues with agencies like the Bureau of Industry and Security (BIS). 

Key terminology in customs exports include: 

• U.S. Principal Party in Interest (USPPI) 
• Exporter (responsible for obtaining licenses or other authorizations for the export) 
• Filing Party (Responsible for filing the EEI) 

• Authorized Agent (Customs Broker or Freight Forwarder hired by the Filing Party) 
   

Another crucial consideration is the duration of the aircraft's stay outside the United States. If an aircraft is expected to remain abroad for 12 months or more, it will probably require a permanent export classification. 

By familiarizing yourself with these aspects of customs exports and seeking professional assistance, you can navigate the complexities of international aircraft transactions more effectively and reduce the risk of regulatory issues. 

Directorate of Defense Trade Controls (DDTC) & International Traffic in Arms Regulations (ITAR) 

Typically, ITAR involves transactions with former military aircraft or aircraft that have been militarized. It is common to see foreign countries selling their trainer aircraft or converting aircraft to trainers. If you deal with ex-military aircraft, you must know ITAR and the DDTC, which is part of the United States Department of State’s Bureau of Political-Military Affairs.  

The top six violations of ITAR include:  

1. Failure to register
2. Lack of Technical Data Licenses
3. Incorrect Documentation 
4. Not Vetting Other Parties 
5. Uncontrolled Technical Data 
6. Willful Failure to Comply 

Russian Sanctions 

Given its current relevance, the panelists addressed Russian sanctions (also discussed in the NAFA webinar Navigating Russian Sanctions). Recently, various agencies, particularly BIS, have enforced Russian sanctions.  

If the circumstances are right, there is an exemption for aircraft operating in Russia called a temporary sojourn. This tool doesn’t apply if the aircraft is registered, owned or controlled by, or chartered or leased by a Russian or Belarus national.   

The temporary sojourn guidance comes directly from the BIS and Export Administration Regulations (EAR) and allows limited operations to Russia under specific conditions. Criteria include a maximum stay of seven days and restrictions on leasing/chartering to Russian nationals.  

When someone asks for a temporary sojourn, prepare to ask tough questions and use common sense. If you sense a red flag, do your due diligence and don't be afraid to walk away from the transaction.  

Additionally, Original Equipment Manufacturers (OEMs) are increasingly tracking aircraft movements and potentially denying service for suspected violations by anyone flying the aircraft to and from sanctioned countries like Russia. Many aircraft operators or owners don't realize the OEMs and suppliers have data and track where aircraft are for various reasons. More and more, manufacturers are terminating suppliers for suspected violations.  

In the event of a potential violation, clients often engage legal counsel to liaise with suppliers, a process that can be both complex and time-consuming. Should a violation occur, one option is to submit a voluntary disclosure to the relevant authorities. While this may result in a warning letter as a best-case scenario, this approach is typically a one-time opportunity and should not be relied on for repeat incidents. Seeking a license can be a possible solution. However, these cases present unique challenges due to disclosure concerns and client apprehensions about sharing operational details with suppliers. Navigate these situations with a balanced approach, weighing the benefits of transparency against the potential risks of non-compliance. 

Conclusion 

NAFA’s Due Diligence 101: Know Your Regulators webinar summarized the regulatory landscape affecting aircraft transactions. By covering a wide range of agencies and regulations, from OFAC sanctions to FAA requirements and export controls, the presenters offered valuable insights into the complexities of compliance in completing aircraft transactions. 

Key themes that emerged throughout the webinar included: 

• The dynamic nature of regulations. 
• The importance of robust compliance programs. 
• The need for thorough due diligence. 
• The complexity of international transactions. 
• The value of professional expertise in navigating these challenges. 

In an industry where regulatory missteps can have severe consequences, including hefty fines and reputational damage, the insights given in this NAFA webinar serve as an important resource for successfully navigating the complex regulatory environment. As regulations evolve and enforcement actions become more frequent and severe, staying informed and maintaining robust compliance programs will be essential for business aviation financing. 

This article was published by NAFA on August 12, 2024.

The aviation industry faces many challenges when conducting transactions involving parties or assets with ties to countries subject to international sanctions. One of the most prominent examples of such sanctions in recent years has been those imposed on Russia by the United States and its allies. To help industry professionals navigate the complexities of these sanctions, the National Aircraft Finance Association (NAFA) recently hosted a webinar titled "NAFA Webinar Russian Sanctions." 

TVPX and Lapayowker Jet Counsel P.A sponsored the webinar. Stewart Lapayowker, Founder of Lapayowker Jet Counsel, P.A., moderated the webinar. The panel featured Cassia Sant'Anna, Corporate Compliance Manager at Embraer, Caroline E. Brown, partner at Crowell & Moring and Jeremy Iloulian, Counsel from Crowell & Moring.  

This article summarizes the key takeaways from the webinar, offering insights and guidance for those involved in aircraft transactions that may have touchpoints with Russia. By understanding the scope and implications of Russian sanctions and conducting thorough due diligence to help ensure compliance, aviation industry professionals can effectively manage the risks associated with these transactions and maintain the integrity of their operations. 
 

Understanding the scope and jurisdiction of Russian sanctions 

It is important to understand the scope and jurisdiction of the U.S. export control and sanctions regime to grasp the full impact of Russian sanctions on the aviation industry. As explained by Caroline E. Brown, U.S. sanctions apply to "U.S. persons," which includes entities incorporated in the United States and individuals physically located or ordinarily resident in the U.S. It is important to note that foreign branches and subsidiaries of U.S. companies are also subject to certain sanctions programs, such as those related to Cuba and Iran. Still, the Russia sanctions program does not currently extend to these foreign entities. 

However, Brown cautioned that the U.S. is willing to use secondary sanctions under a theory of causation. Under this theory, non-U.S. persons can still face penalties for causing U.S. persons to violate sanctions, which can include criminal or civil penalties. Typically, this involves designations for terrorism, but they are available in other contexts, including Russia sanctions. More recently, Brown has seen these secondary violations in financial transactions.  

Moreover, under the "50% rule," entities owned 50% or more by sanctioned individuals or entities are also considered sanctioned, even if not explicitly listed on any sanctions list. This rule highlights the importance of conducting thorough ownership diligence when engaging in transactions with foreign parties. 

Jeremy Iloulian discussed the U.S. export control regime, which operates parallel to the sanctions regime. The U.S. export controls focus on the origin, destination and end-use of items involved in aircraft. This jurisdiction includes the aircraft itself, its engine, parts or the tools you use to repair it. Items subject to export controls include those aircraft and aircraft parts manufactured in the U.S., sent from the U.S., containing a certain percentage of U.S.-origin components or produced using U.S. technology or software. In the context of Russia, the U.S. restricts most items for export, with only a few exceptions for basic components such as paper plates, screws, nuts and bolts. 

These restrictions can apply in a couple of different ways. It can depend on where the product is going, who it is going to, such as someone on the restricted party list, or its intended use. For example, if a civilian aircraft typically uses the item, but you have reason to believe the Russian military will use it, that can impose a different type of control. This is an example of how the export control regime runs in parallel with U.S. sanctions, and in many cases, it's important to look at both regimes in the Russian context.  

The webinar also discussed the "General Prohibition 10" idea. Under U.S. export controls, this rule considers an item "tainted" if it has been or will be exported in violation of U.S. export controls. This means that even if an aircraft is no longer in the United States, it may still be subject to restrictions if it has been involved in prohibited activities in Russia. The panelists stressed the importance of understanding the implications of this rule when conducting due diligence on aircraft with a history of operation in Russia or other sanctioned countries. 

The panelists highlighted that these U.S. sanctions are the types of controls other countries, such as the UK and the EU, have imposed on Russia. The major sanctioning authorities, except for the UN, operate together in a coordinated approach to Russia sanctions. So, anything involving Russian sanctions that may have touch points to those jurisdictions will need to undergo an analysis under U.S., UK and EU sanctions 
 

Lists to monitor for compliance 

Iloulian emphasized the importance of regularly tracking various lists maintained by the Office of Foreign Assets Control (OFAC) and the Department of Commerce to help ensure compliance with Russian 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. 

Brown noted that these lists are often updated, and companies should have robust processes to screen parties involved in transactions against these lists regularly. She also highlighted the importance of the "50% rule," which requires companies to conduct additional ownership diligence to determine whether an entity is owned 50% or more by sanctioned individuals or entities, even if the entity itself is not explicitly listed. 
 

Manufacturer's Perspective 

Cassia Sant'Anna from Embraer provided valuable insights into the manufacturer's perspective on conducting due diligence when dealing with transactions that could involve Russian parties. She emphasized the importance of understanding how the aircraft will be operated and who will be responsible for providing services and support. When dealing with pre-owned aircraft, manufacturers must also consider the aircraft's history and any potential violations of sanctions or export controls that may have occurred during its operation. 

As discussed in earlier NAFA webinars in the Transactional Integrity and Due Diligence series, a standardized checklist to gather necessary information should be part of most due diligence programs for customers to assess potential risks. These checklists include obtaining details about the ultimate beneficial owner of the aircraft, the operator and the intended use of the aircraft.  

The panelists stressed these questions are not meant to be suspicious of any particular person or company but to make sure the manufacturer has conducted proper due diligence and has the evidence to show compliance with regulations.  

Sant'Anna also highlighted the importance of collaboration between different departments, such as sales, compliance and legal teams, to ensure a comprehensive and coordinated approach to due diligence. By fostering open communication and sharing information across departments, aviation finance professionals can more effectively identify and mitigate potential risks associated with transactions involving Russian parties or aircraft with a history of operation in Russia. 
 

Balancing Due Diligence and Transaction Efficiency 

One key challenge faced by parties involved in aircraft transactions is striking the right balance between conducting thorough due diligence and maintaining transaction efficiency. The panelists acknowledged that clients could resist providing detailed information, particularly 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. 
 

Red Flags and Real-Life Examples 

The panelists shared several real-life examples and hypothetical scenarios throughout the webinar to illustrate the complexities of navigating Russian sanctions in aircraft transactions. One common red flag they highlighted was the assignment of a purchase agreement close to the delivery date, which requires a thorough review of the assignee to ensure compliance with sanctions and export controls. They recommended paying close attention to changes in ownership structures and the potential impact of sanctions on banking partners and service providers. 

When evaluating an aircraft's history, the panelists emphasized the importance of examining the specific dates and circumstances of any visits to Russia. While travel to Russia before the implementation of sanctions in February 2022 may be permissible, visits to specific regions like Crimea have been prohibited since 2014.  

The panelists also discussed the challenges service centers, OEMs and service programs face when dealing with pre-buy inspections, parts and potential sanctions concerns. They advised that these entities should have clear policies and procedures to address situations where an aircraft's presence in Russia may have been due to an Aircraft on Ground (AOG) event or other extenuating circumstances. For example, if an aircraft has been in Russia due to an emergency landing or maintenance issue, seeking a waiver from the Department of Commerce may be necessary to address potential violations. By consistently documenting all relevant information, these entities can demonstrate their due diligence efforts and mitigate potential risks. 

Another critical consideration raised during the webinar was the potential impact of sanctions on financing and insurance arrangements. The panelists noted that banks and insurance companies have their own compliance obligations and risk appetites, which may lead them to impose additional restrictions or requirements on transactions involving Russian parties or aircraft with a history of operation in Russia. They recommended that companies engage with their financing and insurance partners early in the transaction process to ensure alignment and avoid any last-minute surprises. 
 

Conclusion 

Navigating Russian sanctions in aircraft transactions requires a proactive and diligent approach from all parties involved. Manufacturers, buyers, sellers and service providers must stay informed about the evolving sanctions landscape and conduct thorough due diligence to mitigate risks. Open communication, standardized processes and collaboration with legal experts can help ensure compliance and maintain the integrity of transactions. 

As the geopolitical situation evolves, the aviation industry must remain vigilant and adaptable to the challenges posed by sanctions and export controls. By understanding the regulatory environment's complexities and implementing robust due diligence practices, industry professionals can navigate Russian sanctions and ensure the smooth execution of aircraft transactions. 

The insights shared during the NAFA webinar serve as a valuable resource for aviation industry professionals. They underline the critical importance of due diligence and transactional integrity in today's complex regulatory environment. By applying these lessons learned and continuing to prioritize compliance, the industry can navigate the challenges posed by Russian sanctions and contribute to a safer, more transparent and more resilient global aviation marketplace.  

Watch the full webinar here: Navigating Russian Sanctions.  
 

Additional Resources  

For those interested in further information, the NAFA website offers a range of information on its  Transactional Integrity Resources page, including access to past webinars and detailed guides on various aspects of aircraft transactions. Please share this page with anyone on your team who would benefit from it.  

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.  

This blog was published by NAFA on June 14, 2024.

In this high-altitude and ever-changing world of aviation, one wrong move could send you into a tailspin of legal troubles and reputational turbulence. That’s why conducting comprehensive due diligence is the ultimate pre-flight checklist for any aircraft transaction.  

The National Aircraft Finance Association (NAFA) recently hosted a webinar titled "Tips for Conducting Due Diligence in Aircraft Transactions," which provided valuable insights and best practices for professionals involved in these transactions. Greg Luster from Insured Aircraft Title Service (IATS) moderated the webinar, which featured panelists Joan Roberts (IATS) and Lacey Perna (TVPX). Insured Aircraft Title Service (IATS) and TVPX sponsored the webinar.  

The discussion featured several industry experts who provided insights into different aspects of due diligence, highlighting the importance of collaborating with various stakeholders in each step of the aircraft transaction process.  

Introduction to due diligence in aircraft transactions 

Due diligence in aircraft transactions involves a thorough investigation to ensure all parts of the transaction are transparent and compliant with legal and regulatory requirements, that you are comfortable with the information and are confident to move forward with the transaction.  

The primary goal is to mitigate risks, whether they are legal, financial or reputational. 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.  

Joan Roberts from IATS discussed the importance of understanding the legal and reputational risks of not conducting due diligence. Legal risks include non-compliance with sanctions and regulations, while reputational risks involve the potential damage to your career and the company’s image if due diligence is not properly conducted.  

Roberts highlighted the importance of using resources like the Office of Foreign Assets Control (OFAC) website to stay updated on sanctions and other legal requirements.   

Starting the due diligence process 

For those starting a due diligence program, the panelists emphasized the importance of meeting compliance goals and understanding the potential consequences of failing to conduct proper due diligence. The primary objectives are to minimize legal and reputational risks, avoid conducting business with questionable individuals or entities and steer clear of problematic jurisdictions. 

Lacey Perna of TVPX acknowledged that the due diligence process can initially seem overwhelming but stressed the importance of taking the first steps. A good start is simply an internet search. You can also use FAA/DOT data, perform a title search on the aircraft and look for airworthiness requirements or restrictions. Perna recommended starting with a general overview and using it as a guide to build a more comprehensive program. 

A critical tool in the due diligence process is the due diligence questionnaire. These forms should include comprehensive questions for the client to answer to fulfill legal and financial requirements. Typical questions may include identifying the parties involved, the source of funds and the business type. Perna noted that while many templates are available online, it is essential to customize the questionnaire to fit your specific requirements.  

If a customer says they have completed the information in your form at another step in the transaction process, such as insuring the aircraft, you can use this information, but you will still need to send your form back to the client for them to answer your specific questions.  No one wants their customer to do more work than necessary, but everyone is looking at the transaction from a different angle and requires different things. Additionally, information can rarely be shared across businesses and needs to come directly from the parties.  

An important step in the initial due diligence process is discovering who really owns the aircraft or 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.  

Collaborating for comprehensive due diligence 

To effectively organize the due diligence process, professionals must understand the legal requirements and make sure every party conducts their own due diligence. However, due diligence doesn’t happen in a vacuum. Each person in the process will collect different information, and each professional will bring their point of view and knowledge to the process.  

Adequate 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. The webinar highlighted various tools and platforms that can help in conducting thorough investigations. These included automated screening tools, databases for sanctions and watch lists and online resources like LinkedIn for verifying employment history.  

Monitoring and ongoing due diligence 

Due diligence is not a one-time process but requires ongoing monitoring. Roberts emphasized the need for continuous screening and updating of information, especially in long-term relationships with clients. This includes conducting periodic reviews and ensuring all information remains current and correct.  

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. 

Roberts discussed the importance of ongoing screening, which involves conducting regularly scheduled searches on selected companies or individuals. While it may be impractical to perform manual searches daily, some retail programs offer automated ongoing screening functions that can help streamline the process.  

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 any necessary changes or new requirements, especially given new regulations such as the Corporate Transparency Act.

Practical tips for conducting due diligence 

The webinar provided several practical tips for conducting effective due diligence:  

     1.  Use multiple sources: Rely on various sources of information, including government databases, information searches and industry-specific tools. A list of commonly used resources is listed at the end of this article.  

     2.  Verify information: Always verify the information from clients through independent searches and documentation.  

     3.  Stay updated: Consult legal experts and industry associations to stay abreast of changes in regulations and industry practices.  

     4.  Document everything: Maintain a thorough documentation trail to demonstrate compliance and due diligence efforts.  

     5.  Trust your instincts: If something or someone feels off, investigate further. Red flags should not be ignored.  

Real-world examples and scenarios

The webinar included real-world examples to illustrate the importance of due diligence in aircraft transactions. These included instances where gut instincts led to the discovery of potential issues, the appearance of unknown parties on insurance certificates and the receipt of funds from uninvolved parties.  

One scenario involved an escrow agent who noticed inconsistencies in a client's information. Despite pressure to close the deal quickly, the agent insisted on further investigation, which ultimately revealed significant issues that could have led to legal complications.  

Frequently Asked Questions 

The webinar also addressed several audience questions, such as the requirements for UBOs in different jurisdictions, the reliability of customer information and the applicability of sanctions when dealing with international transactions. 

The panelists recommended consulting with sanctions attorneys to obtain specific legal advice on these matters. They can provide valuable guidance based on their daily experience dealing with these issues. 

Conclusion 

Conducting effective 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 the best practices and insights shared by the expert panelists in the NAFA webinar, professionals can navigate the complexities of due diligence and mitigate the legal and reputational risks associated with these transactions. 

Collaborating with industry peers, legal counsel, and professional associations can help make sure due diligence practices remain up-to-date and effective in an ever-changing regulatory landscape. By focusing on due diligence and taking a proactive approach to risk management, aviation industry professionals can protect their businesses and clients while facilitating successful aircraft transactions. 

Aircraft transactions are complex and involve significant financial investments, making due diligence a critical component of the process. Please email nafa@fraud.aero anytime to ask questions, report fraud issues or suggest topics for discussion for future webinars. 

Additional Resources 

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. 

Due Diligence Information Sources 

On January 25th, NAFA hosted a webinar titled "Industry Developments in Due Diligence: Know your Regulators." We asked attendees what sources they used to gather due diligence information. Here's what they said (in alphabetical order): 

What platforms do you use for due diligence? 

• 3rd party due diligence software 

• CSC 

• Descartes Systems Group - Visual Compliance  

• Dow Jones - Customer Due Diligence (CDD) & Onboarding  

• Export Controls & Sanctions Compliance Policy  

• FAA  

• Google  

• Internal record keeping  

• JETNET  

• Kharon Research - Compliance and Financial Crimes Compliance  

• Lexis Nexis Risk Solutions - Bridger Insight  

• Lextegrity Compliance Data Analytics  

• OFAC  

• Online platforms  

• Semaphore Intel  

• Verafin - Financial Crim Management Solutions  

• Wingform  

• World Check 

What resources do you look at to determine compliance with FAA regs? 

• Aeronautical Center - Central Region Counsel (ACC) Opinions  

• Aircraft attorney  

• Aircraft Operator or Management Company  

• ARG/US  

• Asset Manager  

• Digital Mx records  

• Escrow  

• FAA counsel  

• FAA examiner handbook  

• FAA Interpretations  

• FAA.gov / FARS / Ch 14 Code of Federal Regulations (CFR) / Advisory circulars / Aeronautical Information Manual (AlM)  

• Internal company resources  

• JETNET  

• Legal research plate forms  

• Logbooks  

• Screening providers  

• Summit  

• Title Companies  

• Westlaw  

• Wingform  

• WorldCheck, Semaphore and internet searches  

• Wyvern 

 This NAFA article was originally published on June 3, 2024.

The National Aircraft Finance Association (NAFA) recently hosted the webinar “Tips for Avoiding Bad Actors in Aircraft Transactions.” The event, moderated by Shelley Svoren, CEO and Founder of Infinite Branches, featured panelists Zipporah Marmor, VP of Aircraft Transactions at ACASS and Jonathan Epstein, partner at Holland and Knight, and was sponsored by Holland and Knight and TVPX.  

The webinar provided insightful tips for identifying red flags, understanding the risks and costs of a bad transaction, the importance of conducting due diligence and fostering collaboration within the aviation industry to maintain transactional integrity and avoid potential fraud. 

Recognizing and examining red flags 

One of the key aspects discussed during the webinar was the importance of recognizing red flags that may indicate potential issues in an aircraft transaction. Everyone involved should conduct their due diligence and not be afraid to question or even stop a transaction if something doesn’t look or feel right.  

Some of the most notable red flags mentioned include:  

1. Deals that seem too good to be true: For example, if a transaction appears exceptionally favorable, such as minimal negotiation or questioning of terms, it warrants further investigation. Zipporah Marmor emphasized that if you receive a purchase agreement returned with little to no comments or questions, it should raise suspicions.  

2. Skipping crucial steps: When a counterparty is eager to skip essential steps in the transaction process, such as due diligence or document verification, it is a significant red flag. Marmor stressed that following the tried-and-true steps of a transaction is crucial, even in a fast-paced transaction and market.  

3. Multiple escrow agents or banks walking away: If several escrow agents or banks decline to participate in a deal without providing clear reasons, it strongly indicates that something may be amiss and requires further investigation.  

4. Last-minute changes to payment details: Jonathan Epstein highlighted that urgent wire requests or last-minute changes to payment instructions could signify a phishing attack or an attempt to divert funds. Therefore, verifying any changes through secure channels is necessary in any aircraft transaction.  

5. Unusual ownership structures or gaps in aircraft history: Complex ownership structures or cases where the ultimate user can’t be clearly identified may indicate potential issues with a transaction. In addition, gaps in an aircraft’s maintenance or flight history may reveal sanctions violations or attempts to conceal the true UBO. Therefore, conducting thorough due diligence on the aircraft’s background is critical.  
   
   For example, in one case, a client revealed that the technicians were reviewing the records on a leased aircraft and discovered that an Iranian airline had conducted maintenance work on the aircraft. The United States currently prohibits the sale of aircraft and spare parts to Iran's aviation industry. 

6. Transactions involving unknown or unverified parties, such as a pilot acting as a broker or an unfamiliar management company, require additional scrutiny. Shelly Svoren shared an example where due diligence on a pilot serving as a broker revealed concerning information, leading to the halting of the transaction.  
   
   Many aircraft transactions go through a third party, and not all are necessarily bad. However, it’s imperative not to take anything for granted. For example, ask the escrow agent to reboot the lien searches the day of or before for any changes in companies. Double and triple-check your facts to make sure you know what you need to know about every transaction you enter into. 

The panelists emphasized that the presence of a red flag doesn’t necessarily mean you should abandon the deal but rather that it necessitates 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.  

Understand the risks and costs 

• Engaging in potentially fraudulent transactions or engaging with sanctioned individuals or entities can lead to severe consequences, including civil and/or criminal penalties, reputational harm, costly government investigations, potential asset seizure and victimization by crime. 
  
  Staying informed about evolving sanctions and export control laws is crucial. Yet, ignoring red flags and not conducting due diligence can also cost significant time and effort.   
   
• For example, one panelist shared that a Part 145 repair station in Florida was selling landing gear to a foreign company that was sanctioned for providing goods and services to Russia. The company then switched the purchase agreement to another company and removed all references to the prior company. In this case, customs filed a forfeiture action. The owner is now out-of-pocket for the landing gear’s cost and the parts have not been able to be used for over a year.  
   
• The truism stands that an ounce of prevention is worth a pound of cure. The expenses and lost sleep when you're the target, for example, if you get a grand jury subpoena, make for a bad day and probably a year or more. Even if you didn't do anything wrong, the costs of doing forensic audits and producing documents for the government can cost an enormous amount of time and add significant costs in audit and legal fees. And these are not isolated incidents.  
   
• Additionally, under U.S. law, willfully or intentionally engaging in an activity without proper due diligence can result in civil or criminal penalties and legal liabilities. While it is true that every transaction carries some level of risk, thoroughly conducting due diligence to the best of one's ability and keeping a record of your due diligence can help mitigate potential issues and provide peace of mind. 
  
  It is important to note that relying on others to conduct due diligence is not a valid defense. Even if a third-party company is hired to perform due diligence, it is still your responsibility to review and validate the information. 
   
• Additionally, each party brings its own unique knowledge and experience to the table, allowing them to spot potential red flags that others might miss. For instance, a lawyer may not have the same perspective as a broker when reviewing due diligence documents. Therefore, it is essential for all parties involved to conduct and keep a record of their due diligence, even if it ultimately validates the information provided by others. This process is not only about ensuring the accuracy of the information but also about maintaining personal and professional integrity. 
   
• In one example, a bank letter was provided stating that the bank had sufficient assets to conclude a transaction, and the letter was signed by two bank employees. However, upon further investigation, it was discovered that the two signatories were no longer employed by the bank. This example highlights the importance of not taking information at face value and going the extra mile to validate it through additional means, such as making phone calls or sending emails. 
   

Collaborate with industry partners 

The aviation industry is a tight-knit community. Building relationships and collaborating with trusted partners, such as financiers, brokers and attorneys, can help identify potential issues early on and ensure a smoother transaction process. The experience of other NAFA members can provide practical examples of avoiding bad actors in future transactions.  

Within your company, encourage team members at all levels to raise concerns when something doesn't feel right. This promotes a culture of collaboration, where asking questions and slowing down a deal, if necessary, is encouraged and supported.  

Stay vigilant throughout the transaction  

Due diligence should not be a one-time exercise. Continuously monitor and update information on clients, even if they are repeat customers. Validate information through multiple sources, and don't hesitate to reach out to industry partners for input.  

For example, if you have a repeat client, it doesn’t mean the same client will be free and clear of any issues in the next transaction. In all cases, conduct due diligence and collaborate with other NAFA members if they are knowledgeable in your transaction.  

Final Thoughts 

The NAFA webinar "Tips for Avoiding Bad Actors in Aircraft Transactions" was a powerful reminder that vigilance, collaboration and a commitment to appropriate due diligence practices are essential in combating fraud and maintaining the integrity of aircraft transactions and the aviation industry.  

The first step to avoiding bad actors is raising your hand when something seems wrong.  Recognizing and examining red flags can make a difference in a clean aircraft transaction. In addition, by understanding the risks and costs associated with fraudulent transactions and fostering a culture of collaboration and due diligence, industry professionals can effectively mitigate the dangers posed by bad actors. 

Collaboration among industry partners is crucial in identifying potential issues early on and ensuring a smoother transaction process. By building relationships with trusted financiers, brokers, attorneys and other NAFA members, individuals can leverage the collective experience and knowledge of the aviation community to navigate complex transactions and avoid pitfalls. 

Ultimately, due diligence should be ongoing throughout the entire transaction and beyond. By continuously monitoring and updating information on clients, validating information through multiple sources and maintaining open lines of communication with industry partners, professionals can stay one step ahead of potential fraudsters. All stakeholders should remain committed to upholding the highest standards of integrity and transparency in aircraft transactions. 

Stay Up-To-Date on Transactional Integrity with NAFA

NAFA is committed to raising awareness and providing education to support transactional integrity in the industry and prevent fraud. Stay tuned for more webinars, articles and opportunities for you to learn more or get involved. Share these resources with your friends and colleagues and help ensure we all can do business as safely and transparently as possible.  

Working in aircraft transactions takes specialized knowledge, and it’s important to mitigate exposure to risk whenever possible. No matter what part of the process you’re involved in, there’s potential for something important to slip through the cracks. Due diligence and transactional integrity are crucial concepts that can bring to light transaction risk and ensure ethical, transparent deals. Let's break them down: 

What is transactional integrity? 

Transaction integrity emphasizes conducting deals with fairness and transparency. All parties involved with a transaction should provide and receive accurate and complete information, and the transaction should adhere to ethical standards. This includes:   

• Disclosure of all material information: No misrepresentation of facts or hiding of crucial details. 

• Compliance with regulations: Adhering to all applicable aviation and financial regulations (for a breakdown of common regulators, see our previous article). 

• Avoiding conflict of interest: Identifying and managing potential conflicts of interest to ensure unbiased decision-making. 

• Anti-corruption measures: Implementing measures to prevent bribery and other corrupt practices. 

What is due diligence? 

Due diligence is the comprehensive investigation conducted before entering into any aviation transaction, such as buying or selling aircraft, securing financing or forming partnerships. It involves thoroughly examining various aspects to mitigate risk and to make informed decisions. 

• Legal and financial analysis: Examining legal documents, contracts, financial statements and compliance with regulations. 

• Operational assessment: Evaluating the aircraft's airworthiness, maintenance records and operational history. 

• Market research: Understanding market trends, comparable valuations and potential risks associated with the markets in which the aircraft will operate. 

• Background checks: Investigating the parties involved in the transaction, including their reputation, source of funds and legal standing. This includes investigating the parties directly involved in the transaction and their links to potential bad actors through business relationships or their likelihood to participate in activities forbidden by regulators. 

Why are these important areas of focus for all professionals working with aircraft transactions? 

• Mitigate risk: Thorough due diligence can identify potential problems early, preventing costly mistakes and legal issues. 

• Streamline the transaction: Good front-end due diligence can help prevent time-consuming surprises later in the process. 

• Protect assets: Transaction integrity safeguards investments and promotes ethical business practices in the aviation industry. 

• Build trust and credibility: Transparency and fairness foster trust between the parties involved, leading to stronger relationships and long-term success. 

By prioritizing due diligence and transaction integrity, the aviation industry can create a safer, more reliable and more ethical environment for all stakeholders. NAFA's Transactional Integrity Working Group was established 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 as well as avenues to report it.  If you experience any issues that you think our membership should know about, please email Fraud@NAFA.aero and our committee will review your submission and consider how best to use the information while maintaining confidentiality for the party reporting. 

Stay Up-To-Date on Transactional Integrity with NAFA

NAFA is committed to raising awareness and providing education to support transactional integrity in the industry and prevent fraud. Stay tuned for more webinars, articles and opportunities for you to learn more or get involved. Share these resources with your friends and colleagues and help ensure we all can do business as safely and transparently as possible.  

This article was published by NAFA on May 10, 2024.

Maintaining transaction integrity is an important part of our role in aircraft transactions, and doing our due diligence on our customers is critical to minimizing risk and maintaining compliance with all our regulators. In our recent webinar, sponsored by TVPX, NAFA members Laura Martino and David Hernandez dig into due diligence and how you can mitigate risk by understanding your regulatory bodies and how to protect yourself and your company. 

So who are the regulators, what are the guidelines, and how do you ensure your transactions are compliant? Of course, you have the Federal Aviation Administration (FAA) and U.S. Department of Transportation (DOT), but you also need to be compliant with the Office of Foreign Asset Control (OFAC), the Financial Crimes Enforcement Network (FinCEN), the Securities Exchange Commission (SEC), the U.S. Department of Justice (DOJ) and more. Noncompliance with any of these regulators can lead to fines, reputational damage, debarment, disgorgement, criminal charges, suspension or denial of import/exports, seizure of assets, and more. 

Here, we'll shed light on some key U.S. regulators. Understanding their mandates and potential risks can help you minimize risk in your aircraft transactions. 

1. OFAC: Enforcing Economic Sanctions 

OFAC, nested within the U.S. Treasury Department, enforces economic sanctions against individuals and countries deemed threats to national security or foreign policy. These sanctions restrict U.S. dealings with entities in adversary states, or involved in terrorism, drug trafficking, and other illicit activities. 

Key points to remember: 

• Relevant Legislation: Trading with the Enemy Act, International Emergency Economic Powers Act 
• Focus Areas: 
  • Country-based sanctions: Cuba, Iran, North Korea, Syria, Crimea, Russia 
  • List-based sanctions: Specially Designated Nationals (SDNs) like individuals or groups linked to terrorism or drug cartels 
• Your potential areas of risk: 
  • Strict liability: Unintentional mistakes or omissions can lead to penalties 
  • Secondary sanctions: companies that are sanctioned because they do business with a state adversary 
  • Sanction evaders: non-US companies that we currently do business with that may ignore U.S. sanctions and then later become SDN 

Resources:  

• OFAC Website 
• Trading with the Enemy Act 
• International Emergency Economic Powers Act 

2. Financial Crimes Enforcement Network 

FinCEN, also under the U.S. Treasury Department, combats money laundering, terrorist financing, and other financial crimes. It ensures the U.S. financial system's integrity by preventing illegal funds from entering it.  

Key points to remember: 

• Relevant Legislation: Bank Secrecy Act, Money Laundering Control Act, U.S. Patriot Act, Corporate Transparency Act 
• Focus Areas: 
  • Money laundering: the use of transactions to obscure the origin of ill-gotten gains 
  • Terrorist financing: money funding terrorist activities and entities 
  • Customer Identification Programs: ensuring covered financial institutions have robust programs identifying and verifying customers  
• Your potential areas of risk: 
  • Partial owners of a company: identity the ultimate beneficial owner (UBO) of a company to determine risk of illicit activity 
  • Accepting laundered money or participating in transactions that launder money 

Resources: 

• FinCEN Website
• Bank Secrecy Act 
• Money Laundering Control Act 
• U.S. Patriot Act 
• Corporate Transparency Act 

3. Securities Exchange Commission and Department of Justice 

The SEC and DOJ share responsibility for enforcing anti-bribery laws, specifically the Foreign Corrupt Practices Act (FCPA). This act prohibits bribing foreign officials to gain business advantages. 

Key points to remember: 

• Relevant Legislation: U.S. Foreign Corrupt Practices Act (FCPA) 
• Focus Areas:
  • Third-party intermediaries: Using them for improper payments can violate the FCPA. 
  • Gifts to politically exposed persons (PEPs): Offering excessive gifts to PEPs can be seen as bribery. 
  • Lack of internal controls: Inadequate oversight can increase bribery risks. 
• Your potential areas of risk:
  • Inappropriate gifts to clients/customers that could be considered bribery. 
  • Strict liability: Unintentional mistakes or omissions can lead to penalties.

Resources: 

• SEC website 
• Foreign Corrupt Practices Act 

4. Bureau of Industry and Security 

The Bureau of Industry and Security (BIS), under the Department of Commerce, regulates the export of sensitive goods and technologies to safeguard national security and foreign policy interests. This involves managing the Export Control List (ECL) and enforcing the International Traffic in Arms Regulations (ITAR). 

Key points to remember: 

• Relevant legislation: Export Control Reform Act (ECRA), Export Administration Act (EAA), International Emergency Economic Powers Act (IEEPA) 
• Focus areas: 
  • Export licensing for controlled items on the ECL, categorized by industry and potential military or dual-use applications. 
  • Enforcing ITAR, which regulates the export of defense articles and services. 
• Noncompliance risks:  
  • Civil and criminal penalties 
  • Export denial 
  • Seizure of goods 
  • Reputational damage 

Resources: 

• BIS Website  
• Export Control Reform Act 
• Export Administration Act 

5. Federal Aviation Administration/Department of Transportation 

The Federal Aviation Administration (FAA), under the Department of Transportation (DOT), plays a crucial role in regulating air travel and ensuring the safety of our nation's airspace. They establish and enforce various regulations for aircraft operations, pilot licensing, maintenance standards, and airport safety, among others. 

Key points to remember: 

• Relevant legislation: Federal Aviation Act of 1958, various amendments and regulations 
• Focus Areas:
  • Aviation safety: Setting and enforcing safety standards for aircraft design, operation, and maintenance. 
  • Pilot licensing and training: Establishing requirements for pilot certification and conducting training programs. 
  • Air traffic control (ATC): Managing the flow of air traffic to ensure safe and efficient movement of aircraft. 
  • Airport safety: Overseeing airport safety standards and inspections. 
  • Consumer protection: Enforcing regulations regarding airline marketing, baggage handling, and passenger rights. 
• Noncompliance risks: 
  • Civil and criminal penalties for individuals and companies 
  • Grounding of aircraft 
  • License suspension or revocation 
  • Reputational damage 
  • Potential for accidents and loss of life 

Resources: 

• FAA Website 
• Department of Transportation Website 

6. U.S. Customs and Border Protection 

Customs and Border Protection (CBP), within the Department of Homeland Security, plays a crucial role in securing U.S. borders and facilitating legitimate trade. They enforce various regulations related to imports and exports, including anti-dumping and countervailing duties.  

Key points to remember: 

• Relevant Legislation: Tariff Act of 1930, Trade Facilitation and Trade Enforcement Act of 2015, various trade agreements with specific countries 
• Focus Areas: 
  • Enforcing import and export laws and regulations. 
  • Collecting customs duties and taxes. 
  • Preventing the entry of illegal goods and people. 
  • Facilitating legitimate trade and travel. 
• Your potential areas of risk:  
  • Misclassification or failure to declare goods 
  • Incomplete or inaccurate documentation 
  • Sanctions violations 
  • Improper or missing licenses/permits 

Resources: 

• CBP Website 
• Tariff Act of 1930 
• Trade Facilitation and Trade Enforcement Act of 2015 

7. State DDC - ITAR 

The Directorate of Defense Trade Controls (DDTC), part of the State Department, implements the International Traffic in Arms Regulations (ITAR) alongside BIS. ITAR governs the export, import, and brokerage of defense articles and services. 

Key points to remember: 

• Relevant legislation: International Traffic in Arms Regulations; The Export Administration Act; The Arms Export Control Act; The International Emergency Economic Powers Act 
• Focus areas: 
  • Licensing the export, import, and brokerage of defense articles and services. 
  • Registering companies involved in ITAR-controlled activities. 
  • Technical assistance agreements related to defense articles. 
• Your potential areas of risk: 
  • Failing to register  
  • Lack of technical data licenses or uncontrolled technical data 
  • Inadequate foreign disclosure management 
  • Improper recordkeeping and documentation 
  • Not vetting third-party vendors 
  • Changing regulations 

Resources: 

• DDTC Website 
• ITAR Basics 
• Arms Export Control Act  

How to mitigate risk 

Following compliance guidelines of all regulators is a critical piece of ensuring transaction integrity. Thorough and proper due diligence is your responsibility and the most effective way to minimize risk and ensure your business only engages in ethical and transparent transactions.  

• Read and understand the legislation related to aircraft transactions 
• Know your customer: thoroughly investigate their identity and affiliations before and throughout a business relationship 
• Understand the true ownership of the companies you work with, and the source of their wealth  
• Keep tabs on that company’s dealings that could potentially lead to sanctions or be connected to money laundering or other financial crimes 
• Have a robust compliance and training program 
• Walk away from a bad deal 
• Seek professional guidance 
• Build sanction-related language into your contracts  

By understanding these key regulators and their areas of focus, you can navigate the compliance landscape with greater confidence and protect your business from unnecessary risks. This blog is for informational purposes only and should not be considered legal advice. Always consult with qualified legal and compliance professionals for specific guidance. 

Stay Up-To-Date on Transactional Integrity with NAFA

NAFA is committed to raising awareness and providing education to support transactional integrity in the industry and prevent fraud. Stay tuned for more webinars, articles and opportunities for you to learn more or get involved. Share these resources with your friends and colleagues and help ensure we all can do business as safely and transparently as possible.  

This article was published by NAFA on February 12, 2024.

David Vandenberg, Chair of the NAFA Transactional Integrity Working Group, discusses cybercrime and Business Email Compromise (BEC).

Be careful not to fall victim.

Fraud involving wire transfers is frightening and possibly more common than you think. Business email compromise (BEC) is the common name for this type of cybercrime, which is exceedingly difficult to halt with technical measures and frequently impossible to undo should an attacker successfully fool a target into sending money.

Employee and customer vigilance is essential for stopping these attacks. The following three details will outline the magnitude of the issue and assist you in avoiding becoming a target of these attacks.

Fact #1: Since 2013, There Have Been Massive Financial Losses.

Since October 2013, BEC, also known as email fraud and email account compromise (EAC), is being monitored both domestically and internationally by the U.S. Federal Bureau of Investigation (FBI). The following current fraudulent wire transfer patterns are concerning:

• Tens of thousands of complaints are made concerning BEC fraud each year, with billions of dollars in losses as a result.

• More than 150 nations and all 50 states in the United States have received reports of BEC frauds.

• Consumers may also be impacted by these attacks, which don't just target businesses and organizations. Examples include BEC schemes that target all parties involved in a real estate transaction, including buyers, sellers, and agents, according to the FBI.

Furthermore, it's critical to understand that BEC attacks involve more than just wire fraud. In order to commit tax fraud and other crimes, for instance, cybercriminals exploit illicitly obtained tax information (such as W-2 statements of American workers). In a different kind of BEC fraud, fraudster impersonate employees in an effort to deceive payroll offices and payroll service providers into diverting direct deposits so they can steal workers' wages.

In conclusion, BEC attacks are pervasive and have an impact on both individuals and enterprises. And while though billions of dollars in damages are now estimated annually, the actual amounts are probably higher because BEC attacks sometimes go unreported. Don't fall into the trap of believing it won't happen to you; cybercriminals target consumers as well as employees and search up, down, and across org charts to discover their targets.
 

Fact #2: BEC Attacks Use the Comfortable to Trick You into Making Poor Choices.

Since BEC attacks are designed in such a way, technical tools are frequently ineffectual against them. Typically, emails don't contain malicious links or attachments, two characteristics of phishing attacks that email monitoring technologies can spot and reject.

BEC attacks, in contrast, make an effort to "glide under the radar," using well-known identities and details to pass for secure, authorized communications. Attackers may use social media and other public information sources to learn more about their targets. They may also establish rapport across several contacts—by phone and email—to make the target think they are speaking with a reliable person. The attacker won't request a wire transfer (or data) until they are certain the target is at ease enough to comply.

Attackers may occasionally use the "spoofing" technique to make messages appear to have originated from a well-known source; in these cases, the sender address resembles a contact you can trust (though a hover over that address will reveal something different). In some situations, fraudsters are able to obtain email login information and send messages from a valid account, making it very challenging for an email receiver to recognise a fraudulent request.

Conclusion: Nothing should be taken at face value when it comes to a wire transfer or payment request (or an email requesting sensitive personal data). Any solicitation of this kind should be viewed critically, especially if the requestor asks for an exception to previously established banking procedures or account information.

Fact #3: You Have the Ability to Thwart BEC Attacks.

To preventing various forms of fraud and safeguarding personal and company data, cybersecurity awareness and a knowledge of email best practices are essential. When it comes to BEC attacks, a few comparatively easy steps can make all the difference:

• Set up a confidential, "need to know" procedure for people to get face-to-face or voice-to-voice confirmation that the request is legitimate if you frequently ask for wire transfers or tax-related information. Make sure to share that procedure with others outside of email, through a reliable method.

• If you frequently process payments or data,

you need to safeguard your organization’s finances and data as well as your reputation. Acting on a request requires both confirmation of the request and authorization to carry it out. This is especially important if you're under pressure to respond quickly or disobey established protocol. Ask your supervisor to implement non-email-based approvals for these types of requests if there aren't any procedures in place to help avoid fraudulent transfers.

• If you routinely approve fund or data transfers, make sure that you are not the only person who can give approval. Working with additional stakeholders to make sure that your process does not have a single point of failure can help you ensure that approvals take place through a channel (or channels) other than email. Never jeopardize the approval chain by permitting transfers to occur outside of the approved protocol. Be ready to be contacted by phone or in-person meetings for approvals.

Conclusion: Parties in the “chain of command” for either funding aircraft transactions or the supporting data need to be aware that email fraud is prevalent and there are steps you can take to ensure the prevention of fraud. It is vital that people are aware of the risks and safety precautions. Remember that you could suffer a BEC attack in your personal life even if you don't frequently engage in these activities at work. Any request for a wire transfer or data transfer should be carefully examined before you act on it, regardless of when it occurs or where it appears to originate from.  It is possible for a fraudulent email to appear legitimate.  Therefore, putting in place a secondary (non-email) based means of confirmation for events like aircraft closing wire instructions should be considered as a standard (best) practice.

This article was originally published on February 15, 2023.