It will hardly come as a surprise to readers that air transportation and the trade in aircraft and parts is inherently international. Thus, participants in these industries have to keep an unblinking eye on the increasingly ubiquitous international regimes of trade and economic sanctions that apply to a wide variety of economic activities.
An aircraft leasing company recently found to its chagrin that it pays to be cautious when navigating the tangled web of sanctions, particularly those enforced by the long arm of the United States.
The US Treasury Department's Office of Foreign Assets Control (OFAC), which maintains the nation's economic sanctions regime, announced on 7 November 2019 sanctions against Apollo Aviation Group LLC (a US company, now d/b/a Carlyle Aviation Partners Ltd) for violation of the then-effective Sudan Sanctions Regulations. While the United States has since rescinded its Sudanese sanctions (formerly 31 CFR Part 538), this does not affect enforcement against violations that took place while the sanctions were in effect. More importantly, this case demonstrates the lengths to which lessors must go in order to insulate themselves from (possibly substantial) liability under the various sanctions regimes.
Beginning in 2013, Apollo Aviation leased three jet engines to an entity incorporated in the United Arab Emirates (Company 1), which then subleased the engines to a Ukrainian airline (Company 2), which then installed the engines on aircraft wet leased (ie, leased with crew) to Sudan Airways, which operated them in and out of Sudan. At that time, Sudan Airways was identified on the OFAC's List of Specially Designated Nationals and Blocked Persons (SDN List), as it was controlled by the government of Sudan. Accordingly, US entities such as Apollo were prohibited from directly or indirectly engaging in transactions with Sudan Airways.
The leases between Apollo and Company 1 contained the usual provisions that prohibited the lessee from maintaining, operating, flying or transferring the engines to any countries subject to US or United Nations sanctions. (This is as far as most lessors feel they need to go to protect themselves.) However, it was only after the engines were returned from lease that Apollo realised that they had been operated by Sudan Airways.
Apollo self-disclosed the violation to the OFAC, which included that as a mitigating factor in reducing the penalty from a statutory maximum of $3 million to $210,600.
The OFAC took some care to point out the lessons to be learned: Apollo's failure was in not exercising diligence throughout the term of the lease to ensure that the engines were utilised in compliance with OFAC regulations. Apollo should have – the OFAC implied – obtained US law export compliance certificates from the lessees and sublessees and periodically monitored its lessee's and sublessee's adherence to the lease provisions requiring compliance with US sanction laws.
As noted, the United States no longer maintains sanctions against Sudan, but sanctions programmes are still in place with respect to Cuba, Iran, North Korea, Russia, Syria, Ukraine, Venezuela and numerous other countries and persons on the SDN List.
In addition to the OFAC restrictions are the Export Administration Regulations (EAR) maintained by the Department of Commerce's Bureau of Industry and Security (BIS). Under the EAR, export licences may be required to re-export foreign-made goods having some amount of US content. In some cases, the threshold for US content is as low as 10%. This means that in the aircraft realm, not only are Boeing aircraft subject to US export controls, but by virtue of various US-origin parts and components, the export of most Airbus, Embraer and Bombardier aircraft may also be restricted under the BIS rules. Lessors – including those based outside the United States – need to be aware that even if they are outside OFAC jurisdiction, they must pay close attention to the rules on the re-export of US goods.
The takeaway from the OFAC's Apollo decision is clear: aircraft lessors cannot rely on a boilerplate lease clause to protect them; rather they must exercise pro-active vigilance over the products that they are leasing out, know their customers and in some cases know their customers' customers.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.