Due Diligence

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. 

NAFA is committed to raising awareness and providing education to support transaction integrity in the industry and preventing 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 blog was published by NAFA on February 12, 2024.

Navigating the intricate landscape of US aviation regulations can feel like piloting through a blind fog, but due diligence is more important than ever. This NAFA members-only webinar, led by seasoned experts from NAFA member companies, will help you understand what to look out for and how to practice due diligence in your aircraft transactions. 

In this webinar, expert contributors Laura Martino, Jeff Towers and David Hernandez will discuss: 

• A deep dive into US regulatory agencies: Demystify their objectives, enforcement powers, and impact on your operations 

• The importance of due diligence in your transactions: Understand how it safeguards your investments, decreases legal risks and promotes smooth, compliant flights. 

• How to spot red flags: Learn to identify hidden dangers lurking in aircraft histories, operator practices and potential regulatory breaches. 

• Risk mitigation strategies: How to plan for the worst when navigating the ever-evolving regulatory landscape. 

 View Webinar