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:
- Office of Foreign Asset Control (OFAC)
- Financial Crimes Enforcement Network (FinCEN)
- Securities and Exchange Commission (SEC) and the Department of Justice (DOJ)
- Federal Aviation Administration (FAA) and Department of Transportation (DOT)
- Bureau of Industry and Security (BIS)
- Customs/Census
- 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:
- For cross-border transactions, conduct title searches. Rely on title companies to help with this process.
- Examine title reports for any blemishes to identify potential issues well before closing.
- Review airworthiness restrictions and requirements, paying close attention to any certificate of airworthiness related issues.
- For international deals, evaluate import/export requirements and potential cross-border complications.
- 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.
- 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.
- 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:
- Failure to register
- Lack of Technical Data Licenses
- Incorrect Documentation
- Not Vetting Other Parties
- Uncontrolled Technical Data
- 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.