Updated Sept. 29, 2022
Highlights
- Sanctions targeting Russia and certain Russian nationals have created unprecedented risk for certain international corporate jet transactions.
- It is estimated that more than 400 business jets are or were beneficially owned by Russian nationals (or dual nationals), and, given regulatory restrictions on operation and maintenance of aircraft, a number of Russian nationals are putting their aircraft on the market.
- Purchasing an aircraft with prior Russian nexus/ownership creates complexity and risk and, as a result, enhanced due diligence is a must.
The U.S., European Union (EU), United Kingdom (U.K.) and many other countries have imposed similar but not necessarily identical sanctions on Russia. In corporate jet transactions, the sanctions laws of several jurisdictions may be implicated.
Sanctions and Export Control Restrictions Affecting Aviation
Sanctions and export control restrictions affecting aviation include:
- U.S. sanctions blocking the assets of and prohibiting transactions with certain Russian companies and individuals, along with the property such companies and individuals own or control. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has designated a number of such persons as Specially Designated Nationals (SDNs). Further, the U.S. Department of Justice (DOJ) established the Task Force KleptoCapture, which is aimed at seizing SDNs’ property, and other countries also are actively looking to seize property (including aircraft and yachts) owned by sanctioned oligarchs.
- Many Russian banks have been designated as SDNs and/or blocked by other countries’ laws, while some Russian entities have been targeted for more limited sanctions. This means funds transfers involving Russian entities that are wired through Russian banks may be blocked or rejected by western banks.
- U.S. export controls generally prohibit the export or reexport of civil aircraft and parts to Russia or for use in Russia, and the U.S. will assert export jurisdiction over virtually all corporate jets regardless of country of manufacture.
- Since March 2, 2022, any flights to or from Russia of an aircraft owned, operated, chartered or leased by a Russian national would violate the Export Administration Regulations (EAR). The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has publicly identified business jets that have violated these laws, in some cases seeking to arrest such aircraft.
If any person has knowledge that the aircraft has been operated or maintained in violation of the EAR, no such person may “sell, transfer, export, reexport, finance, order, buy, remove, conceal, store, use, loan, dispose of, transport, forward, or otherwise service” the aircraft (i.e., the aircraft is “tainted”). - Because a license from BIS is needed to export an aircraft or aircraft technical data or parts to Russia, a license also is needed to export such technical data or parts to an aircraft that is registered in Russia or if a Russian national is “currently controlling, leasing, or chartering” the aircraft. Because of this restriction, many manufacturers have been unable to provide parts or technical support for aircraft outside of Russia believed to be beneficially owned by Russian nationals.
BIS is currently reviewing whether and when a dual national (e.g., a person holding a Russian passport but who subsequently has emigrated and is a citizen or permanent resident of another country) should be considered a Russian national subject to these restrictions.
In contrast, it should be noted that EU persons may generally support maintenance of aircraft outside of Russia for individuals that are not residents of Russia, regardless of citizenship, and non-Russian companies, even if owned by Russians. (EU sanctions prohibit providing maintenance or technical support for aircraft for use in Russia, operated by a Russian air carrier, or for a person or entity resident in Russia regardless of citizenship.)
- Since March 2, 2022, any flights to or from Russia of an aircraft owned, operated, chartered or leased by a Russian national would violate the Export Administration Regulations (EAR). The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has publicly identified business jets that have violated these laws, in some cases seeking to arrest such aircraft.
- Airspace restrictions limit flights both between Russia and certain countries, as well as operations by certain Russian persons within national airspace. In the U.S., the FAA has clarified that this latter restriction only applies to aircraft owned, leased or chartered to Russian nationals who have been identified on a barred entity list and not to all Russian nationals. In the EU, this operational restriction is broader and would prohibit the operation of any aircraft that is owned, chartered or otherwise controlled by a Russian national (regardless of dual citizenship or country of permanent residence).
- On May 8, 2022, the U.S. prohibited U.S. persons from providing accounting, trust, and corporate formation or management consulting services to any person located in Russia on or after June 7, 2022, in addition to requiring the wind-down of existing relationships. Further, OFAC has determined that non-U.S. persons could be sanctioned for providing these services to persons in Russia, even if there is no U.S. nexus. The EU and other jurisdictions have similar restrictions.
Red Flags in Aircraft Transactions
In international aircraft transactions, buyers, brokers and attorneys need to be on the alert for information that there is a Russia nexus. Some red flags that may warrant further investigation are:
- the aircraft is being sold without benefit of an inspection or test flight, which may be evidence that the aircraft manufacturer, operator or others have ceased providing support for the aircraft
- back-to-back deals where the beneficial ownership of the current owner is not fully disclosed
- a recent related party transfer of ownership or recent change of registry without a bona fide sale to a third party
- funds coming from or to be wired to persons other than the parties to the transaction
- the aircraft’s past flight history shows extensive flights to or within Russia prior to imposition of sanctions on Feb. 24, 2022, or that the aircraft was flown to a neutral country such as the United Arab Emirates (UAE) shortly after sanctions were imposed and has not been flown since
Such red flags do not necessarily mean that the transaction cannot go through, but rather, they likely warrant enhanced diligence to ensure that the transaction does not violate sanctions and that the buyer can take good title and receive support for the aircraft after closing.
Steps Parties Can Take to Protect Themselves
Where there are red flags or other risk factors, parties should certainly include additional contractual protections and representations regarding sanctions. However, such representations are not due diligence and will not protect a party from sanctions. Rather, it is critical for a party to conduct and document enhanced due diligence that may include the following examples.
- Most Russian aircraft are owned by non-Russian companies and are not on the Russian registry. Hence, it is critical to determine who the ultimate beneficial owner of the aircraft is, as well as the other parties to the transaction (e.g., lessors, banks being used, etc.). Such parties should be vetted against not only the OFAC SDN list but also other relevant sanctions and export control lists. While parties in back-to-back deals may be reluctant to provide this information, adequate non-circumvent and confidential provisions can be put in place to allay commercial concerns.
- If not apparent, confirm with the aircraft and/or engine manufacturer that the aircraft will be supported, as the manufacturers may have frozen support for the aircraft pending further sanctions review.
- Check the flight history to ensure that the aircraft has not been operated in violation of U.S. export laws and therefore subject to export restrictions.
- Ensure compliance with all relevant jurisdictional restrictions. For example, Bermuda- and Cayman Islands-registered aircraft may trigger U.K. sanctions restrictions.
- Given the rapidity with which sanctions are changing, it is critical to conduct diligence not only at the beginning of the transaction, but also immediately prior to taking delivery.
Will the U.S. Government Help?
Sanctions are aimed at Russia and certain Russian nationals, and the U.S. government has been willing to assist U.S. citizens and others, particularly where such assistance will remove assets from Russian hands and in the interests of aviation safety.
- In Spring 2022, BIS established a process for issuing advisory opinions as to whether persons can service, maintain, buy or operate an aircraft where there is a Russian nexus. However, BIS is reviewing its policy on how to treat individuals or dual nationals who hold Russian passports but have emigrated to another country. In the interim, most advisory opinion requests appear to be on hold.
- If the aircraft has been involved in export violations and is therefore tainted, no U.S. person can buy, sell, maintain or operate the aircraft if they have knowledge of such violation. BIS may issue a waiver in certain circumstances.
- If the aircraft has been involved in export violations, then as a legal matter it is tainted, meaning that no U.S. person can buy, sell, maintain or operate the aircraft if they have knowledge of such violation. BIS may issue a waiver, however, if the aircraft is being removed from Russia, such as incident to repossession by a lessor or lender. This also requires submission of a parallel voluntary disclosure of the violation.
- Where the aircraft is or was beneficially owned by an SDN, then, in all likelihood, a license from OFAC will be needed to complete the transaction. In such circumstances, the proceeds of the sale would need to be placed in a blocked account rather than be remitted to the SDN. OFAC construes the “property interest” of an SDN broadly. For example, in a back-to-back transaction where the buyer is buying the aircraft from a non-sanctioned intermediary, the second transaction would also be subject to blocking as such transfer could be construed as “null and void” by OFAC.
Risks in Engaging in Transactions Involving Russian-Owned Aircraft
There are legal and practical risks that robust due diligence can mitigate against. In addition to reputational harm, a party may be strictly liable for civil penalties or subject to other sanctions, and in the U.S., there are criminal penalties for intentional violations. Further, the aircraft itself could be seized by authorities, for example, when it enters the U.S. In such circumstances, the asset could be forfeited unless the new owner can show they are a bona fide buyer who had no knowledge (after conducting diligence) that the aircraft was tainted property. Similarly, funds transfers could be blocked by banks where an SDN is directly or indirectly involved in a transaction.