As companies in the aviation industry continue to deal with the commercial challenges posed by COVID-19, it is as important as ever that compliance remains a key priority. Attention to effective risk-based compliance can go a long way toward avoiding compliance headaches down the line, particularly when compliance controls are tailored to the specialized sanctions and export controls risks facing the aviation industry. Set out below are five key trade compliance themes to help companies navigate these risks and avoid being the target of a future sanctions or export controls enforcement action.
Considered “high risk,” the aviation industry is an enforcement focus for regulators
Commercial aircraft are a particularly valuable commodity for countries and persons targeted by sanctions, both as a lifeline to the outside world, and as an instrument to perpetrate human rights abuses and authoritarian practices. In a July 2019 advisory directed at the civil aviation industry, OFAC warned of the particularly sophisticated and deceptive schemes used by sanctioned parties to exploit legitimate companies in the aviation industry. OFAC has made clear that it is not just the manufacturers and distributors of aircraft parts and equipment that are within its enforcement crosshairs – industry players involved in freight booking, reservation and ticketing services, maintenance, airline grounds services, catering, interline transfer or codeshare arrangements, and refueling can also face enforcement if done for or on behalf of a sanctioned person.
For example, a series of recent enforcement actions against parties found to have provided services to Iran’s Mahan Air – listed as a Specially Designated Global Terrorist organization in 2011 – demonstrate that regulators are using all tools at their disposal to vigorously police sanctions threats in the aviation industry. The enforcement actions include a February 2020 OFAC settlement with a Switzerland-based civil air transportation technology company for providing commercial telecommunications network and information technology services (including reservation-related services, flight planning and border management services, baggage claim software, cargo movement software, etc.); the May 2020 sanctions designation of a China-based company for acting as a general sales agent; the August 2020 sanctions designations of two UAE-based companies and an individual for acting as freight forwarding agents and suppliers of aviation items; and an August 2020 BIS temporary denial order against six parties in Indonesia for operating an international procurement network of aircraft parts suppliers and repair facilities to acquire and repair US-origin goods.
Regulators hold aviation companies to a high compliance standard
OFAC and other regulators expect companies to take the industry risks seriously, which means that basic compliance programs might not satisfy the compliance expectations that regulators have for aviation companies. A November 2019 OFAC settlement, for example, demonstrates the importance of maintaining effective risk-based compliance controls that are tailored to the elevated sanctions concerns prevalent in the airline industry, as well as the great expectations from regulators that aviation companies will leverage their unique access to data to ensure compliance with applicable rules.
In the November 2019 settlement, the US aviation investment manager involved in acquiring, refurbishing, marketing, and leasing commercial jet aircraft and related components paid a $210,600 penalty to settle 12 violations of the Sudanese Sanctions Regulations. The conduct at issue concerned three aircraft engines leased by the company to a UAE company under a lease agreement that specifically prohibited the lessee from maintaining, operating, flying, or transferring the engines to any countries subject to US sanctions. In violation of the agreement, the UAE company subleased the engines to a Ukrainian airline, which then installed the engines on an aircraft that it operated on behalf of Sudan Airways, a sanctioned person at the time the activity took place. OFAC found that the US investment manager’s compliance efforts were not sufficient – as a large, sophisticated operator in the industry, it should have done more to monitor the lessee and sublessee’s adherence to the lease provision requiring compliance with US sanctions laws, including by obtaining US export compliance certificates from the parties.
US export controls and sanctions are as nimble and far reaching as international air travel
A significant proportion of aviation-related goods, software, and technology originate from the United States or contain enough US-origin content to bring them within the ambit of US export controls. The simple act of flying an aircraft or cargo anywhere outside of the United States, or from the United States to another locale, constitutes an export, re-export, or transfer that could trigger licensing requirements or other export restrictions. As can be seen from some of the enforcement examples noted above, export controls are closely linked to sanctions and must be addressed as part of a robust risk-based compliance program.
The regulatory framework is constantly changing
The aviation ecosystem is deeply intertwined with US national security. As a result, the sanctions and export controls rules regulating this industry are frequently changing to account for shifting US national security priorities and newly identified vulnerabilities. Some of these developments may require companies to adjust the way they do business, such as the June 2019 BIS rule change that terminated a longstanding allowance for private and corporate general aviation aircraft flying to Cuba on temporary sojourn. Others may subject lightly-regulated companies to significant new regulatory restrictions overnight, such as the much-anticipated new export controls on emerging technologies that are essential to US national security. The full list of emerging technologies is still forthcoming, but the small handful of emerging technologies that have been identified so far already includes a category of aircraft. It is critical for companies in the aviation industry to monitor these changes and ensure that their compliance controls are living instruments that are constantly updated to reflect evolving rules and restrictions.
Exporters of civil aviation products and technologies to China face increased compliance burdens
A June 2020 BIS rule change expanded the scope of BIS’s military end use / military end user rule to impose new due diligence obligations and licensing restrictions for exporters of certain US-origin items to China (as well as Russia and Venezuela). The rule change is intended to target trade with companies involved in China’s Civil-Military Fusion strategy, a great focus of which is aviation. Exporters of certain export-controlled items – which include covered navigation systems, avionics equipment, aircraft, gas turbine engines, and related parts, equipment, software, and technology – must now exercise due diligence to determine whether the end recipient in China qualifies as a military end user. A license is required if the exporter has knowledge or reason to know that the item is destined for a military end user, and BIS will review license applications with a presumption of denial.
The aviation industry is not a stranger to regulation and high standards, so in this regard the United States’ approach to trade compliance and enforcement should sound familiar. Aviation companies should take the opportunity to assess their trade compliance programs in light of the rapid regulatory changes, increased attention from enforcement agencies, and expanding reach of export control and sanctions rules.