On November 7, 2019, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced in an Enforcement Information that Apollo Aviation Group, LLC (Apollo), a Florida-based commercial aviation investment and servicing firm, agreed to pay $210,600 to settle twelve apparent violations of the Sudanese Sanctions Regulations (SSR). The alleged violations arose when Apollo leased aircraft engines to an Emirati company, which in turn subleased the engines to a Ukrainian airline that installed them on aircraft leased to Sudan Airways (Sudan Air). Although the SSR are no longer in effect, the SSR were in effect during the period the apparent violations occurred.
OFAC’s announcement is an important reminder to lessors that contractual provisions in lease agreements relating to sanctions compliance may be insufficient to fully mitigate the risk of a U.S. Government enforcement action. It also provides key lessons for how companies can more readily satisfy their compliance obligations in the context of customer relationships where there is a risk that U.S.-origin goods may be diverted to sanctioned persons or jurisdictions.
Overview of Enforcement Action
According to OFAC, commencing in 2013, Apollo leased two aircraft engines to a company based in the United Arab Emirates (UAE Company), which in turn, subleased the engines to a Ukrainian airline (Ukrainian Airline). The Ukrainian Airline subsequently installed the engines on an aircraft it leased to Sudan Air, which at the time was designated on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List). Sudan Air operated the aircraft containing Apollo’s engines from approximately November 2014 through February 2015.
The first two engines were returned to Apollo in March 2015. However, Apollo failed to identify at that time Sudan Air’s prior use of the engines. In May 2015, Apollo subsequently leased a third engine to the UAE Company, which again subleased it to the Ukrainian Airline where it was installed in another aircraft operated by Sudan Air from approximately May 2015 until September 2015. The third engine was ultimately returned to Apollo at the company’s request after it conducted a post-lease review of the first two engines and discovered they had been previously utilized by Sudan Air.
OFAC’s announcement notes that Apollo had implemented certain sanctions compliance measures with respect to its original lease agreement, including a “provision prohibiting the lessee from maintaining, operating, flying, or transferring the engines to any countries subject to United States or United Nations sanctions.” However, “[n]otwithstanding the inclusion of this clause, Apollo did not ensure the aircraft engines were utilized in a manner that complied with OFAC’s regulations.”
As examples of additional compliance measures that Apollo failed to implement, OFAC specifically highlights that: (1) “Apollo did not obtain U.S. law export compliance certificates from lessees and sublessees”; and (2) “Apollo did not periodically monitor or otherwise verify its lessee’s and sublessee’s adherence to the lease provision requiring compliance with U.S. sanctions laws during the life of the lease.” “As a result” of not implementing such additional compliance measures, “Apollo learned where its engines had actually flown only after the engines were returned to Apollo at the end of the lease.”
The Apollo enforcement action is a critical reminder that sanctions compliance is an ongoing process. While contractual provisions or covenants are an important part of a company’s sanctions compliance program, they are frequently insufficient. And OFAC expects companies to implement certain ongoing compliance measures commensurate with their business risks.
OFAC’s May 2019 “A Framework for OFAC Compliance Commitments” specifically highlights the risks posed by similar situations where non-U.S. persons redirect U.S.-origin goods to sanctioned entities or individuals. That said, OFAC notes that its “public enforcement actions in this area have generally been focused on companies or corporations that are large or sophisticated, engaged in a pattern or practice that lasted multiple years, ignored or failed to respond to numerous warning signs, utilized nonroutine business practices, and—in several instances—concealed their activity in a willful or reckless manner.”
Although Apollo is a sophisticated company, OFAC’s Enforcement Information indicates that the apparent violations in this case: (1) were discrete and not part of a larger pattern lasting multiple years; (2) did not involve the failure to respond to numerous “red flags” or warning signs; (3) did not involve a deviation from the company’s normal business practices; and (4) did not involve evidence of willful conduct or concealment. In addition, Apollo voluntarily disclosed the violations to OFAC.
Rather, according to OFAC, the facts underlying the penalty assessment are more accurately summarized as a failure to implement ongoing and effective sanctions compliance protocols that were reasonable and appropriate to Apollo’s business model. Indeed, OFAC’s announcement explicitly states that its “enforcement action highlights the importance of companies operating in high-risk industries” like civil aviation, “to implement effective, thorough and ongoing, risk-based compliance measures . . . .”
Such compliance measures may include: (1) conducting appropriate due diligence to understand the business risks relating both to lessees and sublessees; (2) obtaining U.S. export and sanctions compliance certificates, such as those referenced by OFAC in the Apollo settlement, from multiple parties to a transaction; and (3) conducting periodic reviews and due diligence to ensure that a company’s lessees and business partners are complying with their compliance representations. Of course, there is no “one-size-fits-all” approach and companies must evaluate the factual circumstances relating to each business relationship to determine which compliance measures are most reasonable and appropriate. For example, a company that provides warranty services in relation to a sale of its goods may, depending on its risk analysis, choose to minimize its sanctions exposure by periodically monitoring or otherwise verifying its customer’s adherence to contract provisions requiring compliance with U.S. sanctions laws during the warranty period. In such a circumstance, the seller of goods may consider adopting compliance measures similar to those suggested above for lessors.