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:
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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.
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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.
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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.
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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.
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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. -
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.