In March of 2020, at the request of Congressmen Stephen Lynch and Peter King with the Subcommittee on National Security and the Committee on Oversight and Reform, the GAO released its long-awaited report on the FAA Registry’s ability to handle fraud and abuse risks in aircraft registrations. As the title of the report clearly implies, the GAO found that the FAA Needs to Better Prevent, Detect, and Respond to Fraud and Abuse Risks in Aircraft Registration.
More specifically, however, the report found that the FAA needs to better review and vet the actual owners of aircraft. As we all know, the FAA currently takes filed documents at face value, and records them if they meet certain requirements as set by the FAA itself. While the rest of the industry has been subject to more and more demands to Know Your Customer, and to adhere to KYC and OFAC guidelines, the FAA has remained immune. This report suggests that it is time for the FAA itself to do more due diligence and better vet the entities registering aircraft on its registry.
There is also a clear need to allow law enforcement agencies more access to the data contained in the FAA registry. Currently, registration information is mostly provided in .pdf format which is not easily searchable or accessible. Many law enforcement agencies expressed frustration with an inability to have easy access to this information, and the report outlines opportunities for the FAA to be a center point to house data that could help law enforcement agencies to not only have better access to information, but to potentially allow for better cross-agency coordination to crack down on illegal activity involving the registration and use of general aviation aircraft.
The report seems to focus on increasing transparency in “Opaque Ownership Structures” for registering aircraft, which the GAO believes are at the highest risk for fraud and abuse. Opaque Ownership Structures are legitimate business structures that are widely used by corporations and individuals to facilitate commerce as well as for asset and tax management. However, they lack transparency related to aircraft registrations and can create challenges for safety and law-enforcement investigators seeking information about beneficial owners to support timely investigations.
These ownership structures can include the following:
- shell companies, especially in cases where there is foreign ownership that is spread across jurisdictions;
- complex ownership and control structures involving many layers of shares registered in the name of other legal entities;
- formal nominee shareholders and directors where the identity of the beneficial owner is undisclosed;
- trusts and other legal arrangements that enable a separation of legal ownership and beneficial ownership of assets;
- use of intermediaries in forming legal entities, including professional intermediaries.
It is worth noting that the report specifically excludes publicly traded companies, shifting the focus of these security measures away from commercial airlines and towards the general aviation industry.
On pages 58-59 of the report, the GAO outlined 15 recommendations for Executive Action by the FAA. Many of the recommended improvements to the FAA system are expected to be implemented in the FAA’s modernization project, slated to be completed by October 2021. Generally speaking, the modernization project is expected to help streamline and automate the aircraft registration process, and make the FAA records available to the public at all times. The GAO report includes recommendations for using this new system to improve the FAA’s vetting process of owners registering aircraft on the FAA’s system, and using that technology to allow law enforcement officials more access to registry data. Initial conversations with the FAA indicate they are on track to complete this project by the stated October 2021 deadline.
While the GAO has many recommendations to the FAA, there are still many questions to be answered. These are the Top Issues we have identified:
- The biggest unanswered question causing the most consternation in the industry, is the one involving transparency of ownership information. How much transparency will there really be? Will all aircraft ownership information be made available to the public, or only some? Will there be sections of registry data that remain “private” and only made available to authorized government agencies? That remains to be seen.
- Possibly the second largest question includes cost. The report is clear that the $5 filing fee set in 1964 is not enough to cover even today’s operating expenses, much less the costs to modernize the system. FAA has been talking about increasing registration costs for years, so an increase can likely be expected, but the question of how much remains to be answered. How much will it cost to register an aircraft in the future?
- Time is money, so questions about increases in registration time also remain. If FAA will be doing more vetting of its registrants, how much time will that take? How much longer will it take to register an aircraft with the FAA? What will this do to aircraft closing timelines?
- Lastly, there is the issue of international operations. The report expresses clear concern for FAA’s ability to issue Declarations of International Operations without knowledge or consent of specific law enforcement agencies. FAA currently expedites requests for international flights on a daily basis for the general aviation community, but will they be able to do that in the future? Or will there be a more stringent system of checks and balances required to issue Declarations of International Operations? And how long will it take to finally have one issued?
The FAA has yet to officially respond to the GAO’s report, but they have updated their website on the CARES Initiative to enhance and modernize the FAA registration services. To learn more about it, you can go to their website here: https://www.faa.gov/about/initiatives/cares/
Furthermore, on March 30, 2020, they issued their Third Request For Information, requesting information from the industry. To participate, click here: https://beta.sam.gov/opp/8b7d6e20940d4d5b8b4e8e9e76a991b3/view
As NAFA members, it is important that we participate in any proposed changes to the FAA registration process as much as possible. To the extent that you have time to fill out the FAA’s RFI, we encourage our members to do so.
NAFA will continue to monitor the proposed changes and the FAA’s eventual response and will report those to the membership.
The full report can be found here: https://www.gao.gov/assets/710/705505.pdf