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.