Export Requirements: Overlooked or Observed in the Breach
Few people properly export aircraft from the United States, particularly aircraft that remain on the FAA Registry by way of NCTs. The primary reason many aircraft owners fail to properly export aircraft is that they simply do not realize they are required to do so if the aircraft remains on the FAA Registry. This view is based on the erroneous assumption that because no Federal Aviation Administration FAA Export Certificate of Airworthiness Form 8130-4, is required, no export declaration is required.
Additionally, many aircraft owners (i) are unaware of the Foreign Trade Regulations’ (FTRs’) reporting requirements for certain exports, including aircraft, or (ii) they have taken the view that the export-reporting requirements are merely an administrative task that can be ignored without the risk of penalties. Ironically, except for the customs broker’s fee where such a broker is used, owners are free to file the required export data with the U.S. Census Bureau (Census).
To compound the problem, few in the aviation industry stress compliance with customs export requirements in aircraft transactions because they view the customs export as the foreign buyer’s concern, and sellers often endeavor to deliver the aircraft in the United States to avoid any export-reporting obligations. Finally, some may intentionally ignore customs export disclosure requirements in order to remain anonymous or for other reasons.
Non–U.S. citizens are able to register their aircraft on the FAA Registry and enjoy the benefits associated with coveted “N” registrations because the Federal Aviation Regulations (FARs) permit trustees to facilitate such registrations by establishing NCTs. Given this facilitation under the FARs, serving as an aircraft trustee is a profitable business.
In order to establish an NCT, an aircraft owner simply enters into a grantor trust agreement with a trustee who is a citizen of the United States and transfers or otherwise causes the title to the aircraft to be held by the trust. The effect is that the trustee holds legal title to the aircraft and the foreign owner retains a beneficial interest.
The arrangement also requires an aircraft lease agreement to enable the beneficial owner to operate the aircraft. The trust agreement and lease must be filed with the FAA. The trustee registers the aircraft in its name, and the trustor and the beneficiary are frequently the same person. The FAA does not monitor, regulate, or require any export declaration whatsoever, nor does the FAA perform any due diligence on the trustor. That said, all reputable trust companies perform extensive financial “know-your-customer” and export-control due diligence as recommended by the Bureau of Industry and Security (BIS), which enforces the Export Administration Regulations, and the Office of Foreign Assets Control (OFAC), which enforces the economic sanctions regulations.
NCTs have been under scrutiny by the government for years due to concerns regarding lack of transparency and oversight. Thus, it should not be a surprise that recent customs export investigations relate to the use of NCTs. Perhaps the bigger question is: Why did it take so long for the government to enforce the customs-reporting requirements in the context of NCT aircraft exports?
As discussed below, the AGC Indictment makes clear that the government believes that trustees—acting as the registered owners of the aircraft—are responsible for customs export compliance. This would constitute an unanticipated and very significant reallocation to trustees of the risks associated with use of NCTs to achieve FAA registration for aircraft that are exported well before, concurrently with, or after registration.
The Regulatory Overview
As an initial matter, Census is responsible for collecting, compiling, and publishing U.S. export trade statistics. Prior to July 2, 2008, a paper Shipper’s Export Declaration form filed through the Automated Export System (AES or AESDirect) was the primary method for collecting export trade data, and Census used the data for statistical purposes only. On July 2, 2008, the requirements changed, and export trade data became required to be reported online through the AES as Electronic Export Information (EEI) if any parts and labor valued over $2,500 are exported or if the parts or service are subject to export license requirements.
The AES enables EEI to be filed directly with the U.S. Customs and Border Protection (CBP) and Census. CBP enforces the EEI filing requirements. The BIS also uses EEI data for export control enforcement purposes to detect and prevent the export of certain items by unauthorized parties or to unauthorized destinations or end users. Census thus delegates its regulatory enforcement in this area to the BIS and CBP, each of whichhas administrative subpoena authority.
The EEI filing requirement also serves national security purposes because the electronic filing strengthens the government’s ability to prevent the export of certain items by unauthorized parties, such as BIS- and OFAC-sanctioned entities, to unauthorized destinations and end users. The EEI filings aid in targeting and identifying suspicious shipments prior to export and afford the government the ability to significantly improve the quality, timeliness, and coverage of export statistics.
EEI Filing Requirements
EEI filing requirements are extremely complex, and it is wise to hire a customs broker to ensure that the EEI is filed properly. The EEI must be filed through the AES by the U.S. principal party in interest (USPPI), the USPPI’s authorized agent, or the authorized U.S. agent of the foreign principal party in interest (FPPI). Generally, the foreign aircraft buyer should file the EEI, and it typically hires a customs broker as its authorized agent to physically file the EEI.
The principal parties in a transaction, for the purpose of these export requirements, are the parties who receive the primary benefit, monetary or otherwise. Generally, the principal parties in interest in a transaction are the seller and the buyer. In the context of a transaction, the USPPI is the person or legal entity in the United States that receives the primary benefit, monetary or otherwise, from that transaction. That person or entity is generally the U.S. seller, manufacturer, order party, or a foreign entity if it is in the United States at the time goods are purchased or obtained for export (i.e., if the foreign buyer is taking delivery).
The foreign entity must be listed as the USPPI if it is in the United States when the items are purchased or obtained for export and follow the applicable provisions for filing the EEI pertaining to the USPPI. The allegations in the AGC Indictment make clear the government’s position that these procedures should have been followed for the vast majority of aircraft exports (i.e., the foreign buyer should have filed the EEI with the assistance of a customs broker acting as the foreign buyer’s authorized agent and power of attorney).
Specific instructions also exist for filing EEI for aircraft when sold while outside the United States. In most cases, the EEI should be filed prior to exportationunless the USPPI has been approved to submit export data on a post-departure basis, which should not ordinarily be the case. Aircraft sales requiring a license or license exemption may be filed post-departure only when the appropriate licensing agency has granted the USPPI authorization.
All EEI filings must be “complete, correct, and based on personal knowledge of the facts stated or on information furnished by the parties to the export transaction. The filer . . . [must] be physically located in the United States at the time of filing, have an EIN [federal Employee Identification Number] or DUNS [Data Universal Numbering System number], and be certified to report in the AES. In the event that the filer does not have an EIN or DUNS, the filer must obtain an EIN from the Internal Revenue Service.” Importantly, the “filer is responsible for the truth, accuracy, and completeness of the EEI, except insofar as that party can demonstrate that it reasonably relied on information furnished by other responsible persons participating in the transaction.” As noted above, the process is very challenging for any party endeavoring to export an aircraft, and the referenced requirements for an EIN, DUNS, and U.S. presence are often problematic for non-U.S. parties.
Finally, parties filing an EEI must ensure that (i) the filing contains complete and accurate information; (ii) any customs broker or other agent filing on behalf of the USPPI or FPPI has a power of attorney or written authorization to file the EEI; (iii) the required information is filed in a timely manner in accordance with the FTRs; (iv) fatal errors, warning, verify, and reminder messages, as well as compliance alerts where applicable, are promptly responded to; (v) the exporting carrier is provided with the required proof-of-filing citations or exemption legends in accordance with the EEI requirements; and (vi) corrections or cancellations to the EEI are promptly filed.
Why Regulated Parties Should Care: The Penalties
Failure to file an EEI or submitting false or misleading information to the AES has significant criminal and civil penalties, including aircraft seizure and forfeiture.
Criminal Penalties
Criminal penalties are substantial. “Any person, including any USPPI, authorized agents or carriers, who knowingly fails to file or knowingly submits, directly or indirectly, to the U.S. Government, false or misleading export information through the AES” or “who knowingly reports, directly or indirectly, to the U.S. Government any information through or otherwise uses the AES to further any illegal activity” shall, with respect to any of these violations, “be subject to a fine not to exceed $10,000 or imprisonment for not more than five years, or both, for each violation.” Additionally, any person who is criminally convicted faces the risk of forfeiture of their aircraft to the government of any or all of that person’s
- “interest in, security of, claim against, or property or contractual rights of any kind in the goods or tangible items that were the subject of the violation”;
- “interest in, security of, claim against, or property or contractual rights of any kind in tangible property that was used in the export or attempt to export that was the subject of the violation”; and
- “property constituting, or derived from, any proceeds obtained directly or indirectly [because] of this violation.”
False Statements
Not surprisingly, it is a crime under 18 U.S.C. § 1001 for any person to make a false statement to a federal agent either in response to an inquiry or voluntarily. Certain false responses to questions propounded for administrative purposes, including statements to BIS agents regarding the circumstances related to the export of an aircraft during routine inquiries, are also prosecutable, as are untruthful “nos” if a party initiates contact with the government in order to obtain a benefit such as facilitation of an aircraft sale.
The false statement crime is particularly problematic for aircraft owners who by innocent mistake or with the intent to deceive assert that their aircraft were never exported, even though some of the related transaction, trust, financing, and state sales tax exemption documents may establish that the aircraft were “exported” for the purposes of the applicable export requirements and that the owner should have filed an EEI.
Civil Penalties
The most common export violation is referred to as a “failure to file” an EEI, which results in civil penalties and occurs if the government discovers that no AES record exists for an export transaction in the form of an EEI Internal Transaction Number (ITN). Any AES record filed later than 10 calendar days after the due date is a failure to file, and the maximum penalty is $10,000 for a failure-to-file violation. A late-filing violation occurs when an AES record is filed after the required period prescribed, with a maximum penalty of $1,100 per day, up to a maximum of $10,000 per violation. Filing false or misleading information is subject to a maximum civil penalty of $10,000 per violation, which may be in addition to any other penalty imposed.
Next to criminal penalties, civil forfeiture penalties are the biggest concern for most aircraft owners and lessors. The government has the authority to seize any aircraft involved in a civil or criminal violation of the FTRs, and the aircraft may be subject to a forfeiture sale under the FTRs. As the AGC Indictment details, the government seized several aircraft and has the authority to seize any aircraft that has not been exported properly in accordance with the applicable regulations.
The Export-Related Indictment Allegations
The AGC Indictment illustrates the consequences of failing to properly export an aircraft—albeit a worst-case scenario—and should be a warning to any aircraft owner who is deemed to have exported an aircraft from the United States. Suffice it to say, the days of ignoring EEI filings are over.
Count Five of the Indictment focuses on AGC’s actions in its capacity as trustee and alleges a conspiracy to commit aircraft export in furtherance of a criminal act. AGC’s widespread failure to file an EEI was discovered by the BIS’s Office of Export Enforcement (OEE) and Homeland Security Investigations, which initiated an investigation into defendants after noticing irregularities in aircraft filings and learning that several defendant-registered aircraft were seized or destroyed by the government of a foreign country in which such aircraft were located because an agency of that government believed that the aircraft were involved in smuggling drugs internationally. The OEE also discovered that no EEI was filed for many of the aircraft under investigation.
The U.S. government alleges in the Indictment that AGC, as the registered owner of the aircraft upon and after entering into a trust arrangement, was responsible for complying with aircraft export-reporting obligations imposed on aircraft owners, and states that such obligations cannot be delegated to third parties. To support its position, the government relies upon the FAA’s NCT Policy Guidance, stating as follows:
The regulatory obligations of an owner trustee with regard to an aircraft registered in the U.S. using a non-citizen trust are, and always have been, the same as the regulatory obligations of all owners of U.S. registered aircraft. The FAA Registry is an “owner” registry; it is not an “operator” registry. Once the FAA completes the registration process, the registered owner is the owner for all purposes under the regulations. The FAA has determined that there is nothing inherent in the status of a trustee owner of a U.S.-registered aircraft that would affect or limit its responsibilities for ensuring compliance with applicable laws and regulations. Thus, an owner of an aircraft on the U.S. registry cannot avoid a regulatory obligation imposed on it by the FAA simply by entering into a private contract with another party.
The aircraft is subject to United States regulations and requirements, including those issued by the Department of Commerce. The Owner Trustee promised the FAA compliance. If the aircraft is exported, then the Trustee must insure the required Electronic Export Information is filed under 15 C.F.R. §§ 30.3, 758.1(b)(5), and 758.2. AGC refused to comply, even when confronted by United States authorities.
However, despite the position taken by the government in the Indictment, many in aviation industry businesses continue to believe that if an aircraft is exported, it is not the trustee’s responsibility to ensure that the required EEI is filed.
The AGC Indictment also describes a cautionary example of a seizure and forfeiture action related to the failure to file an EEI. On October 20, 2017, a Learjet 31A aircraft (N260RC) was placed into an AGC trust and lease. On January 31, 2020, the beneficial owner of the aircraft was scheduled to depart Brownsville, Texas, for Monterrey, Mexico. The beneficial owner’s pilots allegedly failed to provide CBP Advance Passenger Information System filings for each passenger at least one hour before departure, and the aircraft was seized. Upon discovering that the aircraft had been outside of the United States for three years without any EEI filing, the government is now pursuing a forfeiture action against the aircraft.
Ramifications for the Aviation Industry
The AGC Indictment has fundamentally altered the risk dynamic for trust companies, the likely result of which includes, among other things, increased regulatory compliance costs, enhanced indemnifications in favor of the trustees, and a comprehensive reevaluation of the entire NCT business model.
Many in the government apparently view NCTs as merely selling access to the coveted FAA Registry with very little oversight or transparency. It is doubtful whether the FAA has the resources or authority to conduct any meaningful safety oversight or surveillance of the thousands of U.S.-registered aircraft based outside of the United States, and it is possible that there are many aircraft being leased or subleased without the required notice to the FAA, and without the trustee’s knowledge.
Adding to the increased scrutiny of NCTs is a tragic accident involving an NCT-registered aircraft that operated primarily outside of the United States. On January 21, 2019, a Piper Malibu (N264DB)—operated by a pilot not licensed to operate the flight—crashed in the English Channel, resulting in the death of Argentine football player Emiliano Sala. That aircraft was registered to the Southern Aircraft Consultancy, a U.S. trustee based, ironically, in Bungay, Suffolk, United Kingdom. FAA regulations permit a U.S. trustee to be based anywhere in the world.
Significant risk and default concerns exist for parties with an interest in an aircraft facing Government seizure for failing to file an EEI. Among other things, aircraft that were not properly exported are subject to seizure, and such circumstances likely present a very serious coverage problem for insurers and may trigger policy cancellations. Lessors and lenders should also determine whether, with respect to any FAA-registered aircraft leased to or securing the repayment of a loan to a customer that are being operated primarily outside of the United States, the aircraft were properly exported and, if not, immediately assess the potential risks.
As the AGC Indictment makes clear, the government’s position is that “[i]f the aircraft is exported, then the Trustee must insure the required Electronic Export Information is filed under 15 C.F.R. § 30.3, 758.1(b)(5), and 758.2.” However, the FTRs are ambiguous regarding whether a trust company is actually the party responsible for filing the EEI. As a result, the ramifications for trusts, lessors, banks, financial institutions, foreign buyers, U.S. sellers, and customs brokers are potentially enormous. All aircraft transactions will have to address which party is responsible for customs export compliance, and an EEI ITN will become an industry standard requirement. A common industry joke was that it has been easier to find a leprechaun with a pot of gold than an aircraft customs broker because the services of a customs broker were rarely required—until now. Aircraft customs brokers will likely be a growth industry going forward.
It is also unclear how trust companies that offer NCTs will survive without additional oversight and increased transparency. The beneficial owner’s strong desire for privacy must be weighed against the government’s legitimate national security interests and the need for transparency. At a minimum, the aviation industry must start mandating compliance with the requirement to file an EEI. Any such filing, if applicable, must be an aircraft transaction closing checklist item going forward. Most importantly, the parties to any related transactions, especially lessors and lenders, must monitor and enforce compliance with these requirements. Lenders, lessors, and other transaction parties must also be aware of the implications of the government’s investigations and position regarding export compliance on a going-forward basis, and they should also be aware that there could be implications regarding aircraft in their portfolio that were previously held in trust and permanently exported in violation of the referenced export laws. In that regard, it is critical that they seek advice of counsel regarding what might be a prudent course of action, including due diligence and any follow-up should they identify any potential noncompliance.
Government concerns regarding, and scrutiny of, NCTs are not new; the OEE enforcement and subpoenas are the new development, and the aviation community is now taking the applicable reporting obligations more seriously to avoid being swept up in the next aircraft seizure. It is unclear whether the government realizes the tsunami it has caused throughout the industry or the potential ramifications. However, with each subpoena issued by the OEE, the government is becoming more aware of the scope of the problem of widespread failure to file an EEI. And given that the requirement to file an EEI is based on U.S. national security interests, it is very doubtful that the government will change its position regarding a trustee’s responsibility to file the EEI merely because of the challenges associated with filing or because the trustee contractually shifts EEI filing responsibility to the beneficial owner.
As is the case with most significant regulatory events, the industry will figure out how to deal with the increased regulatory scrutiny pertaining to the export of NCT aircraft. In particular, those in the industry will learn to file EEIs, and the situation will be better after the dust settles. Until then, we will persevere, comply with the regulatory requirements, and resolve the issues in accordance with the applicable law. Good luck to all!
