AINsight: Will Sanctions on Russia Upend Bizjet Sales?

 - March 11, 2022, 12:26 PM

The Russian invasion of Ukraine has drawn condemnation and severe sanctions from governments globally, including the U.S., UK, European Union, Canada, and even neutral Switzerland. Many businesses worldwide have pulled back from doing business with, or suspended selling goods and services in, Russia. The sanctions as a whole will almost certainly have serious and perhaps economically devasting consequences for Russia, including in its business aviation segment.

According to WingX, of the 3,860 private jet flights by Russian aircraft this year as of February 21, large-cabin, ultra-long-range, and VIP airliner business jets represented 43 percent of flight operations in the country. As global flight operations continue to rise, strong demand to purchase such jets persists amid the ultra-low inventory of preowned jets available for sale.

Will any of the hundreds of Russian-owned or controlled jets be sellable and sold while sanctions are in effect? For now, it appears so, but the parties may have to traverse a minefield of sanctions and other transaction obstacles to close such purchases.

Sanctions at Work

The U.S. and its partners have imposed unprecedented and expansive sanctions against Russia. Some sanctions directly affect potential sellers of whole and fractional interests in private aircraft. More broadly, the U.S. has sanctioned oligarchs, Russian elites, Russian banks and other financial institutions, together with residents of Belarus and the so-called Ukraine regions of the Donetsk People’s Republic (DNR) and the Luhansk People’s Republic (LNR) (each a Russian person).

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) has imposed enhanced export and reexport controls on Russia, along with prohibitions on the supply or sale of goods, services, or technology to Russia, all under the Export Administration Regulations (EAR). The rules require export licenses for certain items, including certain avionics, aircraft and aircraft parts and components. BIS will deny a specific license with rare exceptions based on its “policy of denial.”

The U.S. Department of the Treasury Office of Foreign Assets Control (OFAC) also sits at the center of the sanction efforts. OFAC has added “designated” Russian persons to its sanctions lists with whom U.S. individuals cannot do business unless authorized by OFAC. Under these regulations, Executive Order 14024 prohibits all of these transactions unless a license allows them to occur.

OFAC has issued several general licenses to authorize activities that Executive Order 14065 otherwise prohibits. If applicable, an OFAC license allows all U.S. persons to engage in certain actions without applying for a specific license. However, OFAC has “designated” certain Russian persons with close ties to Russian president Vladimir Putin as “Specially Designated Nationals” (SDNs). As a practical and legal matter, it is hard to imagine any transaction with an SDN will or should take off anywhere that sanctions exist.

Sanctions also affect flight operations. For example, on March 10, the FAA issued a notam stating, in part, that “all aircraft registered in the Russian Federation; all Russian state aircraft, regardless of the state of registry of the aircraft; and all aircraft, regardless of the state of registry, owned, chartered, leased, operated, or controlled by, for, or for the benefit of, a Russian person or entity identified by the international trade administration’s consolidated screening list are prohibited from operating to, from, within, or through U.S. territorial airspace.”

Plausibility of Russian Aircraft Purchases

Despite the highly complicated and rapidly evolving sanction rules worldwide, purchasers may initiate purchase, leasing, and financing transactions with unsanctioned and other Russian persons who can lawfully sell assets. The seller may have the obvious motivation to generate cash in U.S. dollars or other acceptable currencies to offset financial losses associated with economic sanctions on Russia.

Regardless of whether a Russian person is sanction-free, the associated reputational risk for institutions may loom large. And other sanctions may still apply that, for example, have caused, or will cause, the seller to lose insurance coverage or be unable to acquire parts to maintain and safely operate their aircraft.

Although experienced business aviation brokers and lawyers are accustomed to negotiating international transactions, the current environment is different than before the Russian invasion of Ukraine. Whether a Russian person (or another non-Russian person), as the true owner, registers an aircraft in Austria, Malta, San Marino, or another respected aircraft registry, the owner may lawfully create a complex web of partnerships, trusts and LLCs, corporations, and other organizations that indirectly own the aircraft. In doing so, the owner may obscure their identity from the parties involved in the transaction.

Similarly, in the U.S., a person who is not a “citizen of the United States” or does not otherwise qualify as a U.S. citizen under the FARs, including a Russian person, may create a “non-citizen trust” (NCT). The NCT trustee qualifies as a U.S. citizen for the Russian person (or another non-U.S. citizen), holds legal title to the aircraft, and registers the jet at the FAA.

By connecting a sophisticated ownership structure to the beneficial interest of an NCT, Russian persons or other sellers may create an impenetrable block to discovering they are the true beneficial owners. Even before the Russian invasion, such structuring created controversy in the U.S. on the transparency, abuse, and national security risks posed by not identifying foreign aircraft owners to the FAA or on the FAA aircraft registry.

Unintended Consequences and the Diligence Solution

In what may seem like an unintended consequence of sanctions against Russia, any of the thousands of non-Russian persons who prefer a back-to-back sale or use a complex ownership structure for tax, trade, security, and other valid reasons may necessarily become snarled up in a Russian-type deal scrutiny.

If the purchaser cannot confirm the seller is a non-sanctioned Russian person or other lawful seller, the purchaser may need to walk away from the deal. However, the sale might proceed if the true seller surfaces or the purchaser can establish, with the advice of counsel, that sanctions do not apply or a license exists or may be obtained for the purchase.

Also, the purchaser should conduct extensive diligence to amass compelling authority that the purchase will be lawful. For help on sanctions, the purchaser’s counsel can contact OFAC, BIS, or other government agencies with questions.

The parties, including escrow agents, should document their diligence fully, retain the material for their permanent file, and put it in a form that is ready to show a government agency that may question a transaction. One such agency is the U.S. Justice Department, which created Task Force KleptoCapture. The task force enforces the sanctions, prosecutes the criminal misuse of cryptocurrencies and digital assets, and, among other powers, apparently may seize jets owned or operated by sanctioned Russian persons.

Conclusion

Hopefully, no one in the business aviation industry will look askance at the human tragedy caused by Russia’s invasion of Ukraine. But private aviation is a transactional and relationship business with value and responsibility around the globe. We can, with due caution, continue to pursue multi-national purchases and sales of aircraft that may involve Russian persons while we each do what we can to support a peaceful and constructive resolution of our geopolitical realities.

This blog is purely informational and reflects the author’s experience and legal practice. It does not, and should not be construed to, provide legal advice of any kind, express or implied, or create a lawyer-client relationship. Persons involved directly or indirectly in any issue covered in this blog should inquire of their counsel, senior executives, and other trusted advisors on the subject matter herein.