Due Diligence

Feeling overwhelmed by due diligence requirements? You're not alone. Navigating the vast landscape of platforms and regulations can be a daunting task. This insightful webinar will equip you with the knowledge and tools to develop a robust due diligence program or enhance your existing processes.

By attending this webinar, you'll learn:

• Expert tips: Learn from industry professionals on crafting a due diligence program that meets your compliance requirements.
   
• Real-world scenarios: Gain practical insights through interactive Q&A and case studies that demonstrate the consequences of non-compliance.
   
• Platform pointers: Discover valuable resources and explore which websites can streamline your due diligence process. 
   
• Longstanding vs. one-time: Understand the nuances of due diligence for ongoing partnerships compared to one-time deals.
   

Don't get caught off guard in your transactions. Due diligence and transaction integrity are everyone’s responsibility. All members of your team involved in any aspect of the due diligence process will benefit from this information. 

View Webinar here
 

NAFA thanks our webinar sponsors TVPX and Insured Aircraft Title Service, LLC.

This NAFA webinar originally aired on May 17, 2024.

The National Aircraft Finance Association (NAFA) recently hosted the webinar “Tips for Avoiding Bad Actors in Aircraft Transactions.” The event, moderated by Shelley Svoren, CEO and Founder of Infinite Branches, featured panelists Zipporah Marmor, VP of Aircraft Transactions at ACASS and Jonathan Epstein, partner at Holland and Knight, and was sponsored by Holland and Knight and TVPX.  

The webinar provided insightful tips for identifying red flags, understanding the risks and costs of a bad transaction, the importance of conducting due diligence and fostering collaboration within the aviation industry to maintain transactional integrity and avoid potential fraud. 

Recognizing and examining red flags 

One of the key aspects discussed during the webinar was the importance of recognizing red flags that may indicate potential issues in an aircraft transaction. Everyone involved should conduct their due diligence and not be afraid to question or even stop a transaction if something doesn’t look or feel right.  

Some of the most notable red flags mentioned include:  

1. Deals that seem too good to be true: For example, if a transaction appears exceptionally favorable, such as minimal negotiation or questioning of terms, it warrants further investigation. Zipporah Marmor emphasized that if you receive a purchase agreement returned with little to no comments or questions, it should raise suspicions.  

2. Skipping crucial steps: When a counterparty is eager to skip essential steps in the transaction process, such as due diligence or document verification, it is a significant red flag. Marmor stressed that following the tried-and-true steps of a transaction is crucial, even in a fast-paced transaction and market.  

3. Multiple escrow agents or banks walking away: If several escrow agents or banks decline to participate in a deal without providing clear reasons, it strongly indicates that something may be amiss and requires further investigation.  

4. Last-minute changes to payment details: Jonathan Epstein highlighted that urgent wire requests or last-minute changes to payment instructions could signify a phishing attack or an attempt to divert funds. Therefore, verifying any changes through secure channels is necessary in any aircraft transaction.  

5. Unusual ownership structures or gaps in aircraft history: Complex ownership structures or cases where the ultimate user can’t be clearly identified may indicate potential issues with a transaction. In addition, gaps in an aircraft’s maintenance or flight history may reveal sanctions violations or attempts to conceal the true UBO. Therefore, conducting thorough due diligence on the aircraft’s background is critical.  
   
   For example, in one case, a client revealed that the technicians were reviewing the records on a leased aircraft and discovered that an Iranian airline had conducted maintenance work on the aircraft. The United States currently prohibits the sale of aircraft and spare parts to Iran's aviation industry. 

6. Transactions involving unknown or unverified parties, such as a pilot acting as a broker or an unfamiliar management company, require additional scrutiny. Shelly Svoren shared an example where due diligence on a pilot serving as a broker revealed concerning information, leading to the halting of the transaction.  
   
   Many aircraft transactions go through a third party, and not all are necessarily bad. However, it’s imperative not to take anything for granted. For example, ask the escrow agent to reboot the lien searches the day of or before for any changes in companies. Double and triple-check your facts to make sure you know what you need to know about every transaction you enter into. 

The panelists emphasized that the presence of a red flag doesn’t necessarily mean you should abandon the deal but rather that it necessitates further investigation and due diligence. By maintaining a curious and proactive approach, asking questions and verifying information through multiple sources, industry professionals can help mitigate the risks associated with bad actors in aircraft transactions.  

Understand the risks and costs 

• Engaging in potentially fraudulent transactions or engaging with sanctioned individuals or entities can lead to severe consequences, including civil and/or criminal penalties, reputational harm, costly government investigations, potential asset seizure and victimization by crime. 
  
  Staying informed about evolving sanctions and export control laws is crucial. Yet, ignoring red flags and not conducting due diligence can also cost significant time and effort.   
   
• For example, one panelist shared that a Part 145 repair station in Florida was selling landing gear to a foreign company that was sanctioned for providing goods and services to Russia. The company then switched the purchase agreement to another company and removed all references to the prior company. In this case, customs filed a forfeiture action. The owner is now out-of-pocket for the landing gear’s cost and the parts have not been able to be used for over a year.  
   
• The truism stands that an ounce of prevention is worth a pound of cure. The expenses and lost sleep when you're the target, for example, if you get a grand jury subpoena, make for a bad day and probably a year or more. Even if you didn't do anything wrong, the costs of doing forensic audits and producing documents for the government can cost an enormous amount of time and add significant costs in audit and legal fees. And these are not isolated incidents.  
   
• Additionally, under U.S. law, willfully or intentionally engaging in an activity without proper due diligence can result in civil or criminal penalties and legal liabilities. While it is true that every transaction carries some level of risk, thoroughly conducting due diligence to the best of one's ability and keeping a record of your due diligence can help mitigate potential issues and provide peace of mind. 
  
  It is important to note that relying on others to conduct due diligence is not a valid defense. Even if a third-party company is hired to perform due diligence, it is still your responsibility to review and validate the information. 
   
• Additionally, each party brings its own unique knowledge and experience to the table, allowing them to spot potential red flags that others might miss. For instance, a lawyer may not have the same perspective as a broker when reviewing due diligence documents. Therefore, it is essential for all parties involved to conduct and keep a record of their due diligence, even if it ultimately validates the information provided by others. This process is not only about ensuring the accuracy of the information but also about maintaining personal and professional integrity. 
   
• In one example, a bank letter was provided stating that the bank had sufficient assets to conclude a transaction, and the letter was signed by two bank employees. However, upon further investigation, it was discovered that the two signatories were no longer employed by the bank. This example highlights the importance of not taking information at face value and going the extra mile to validate it through additional means, such as making phone calls or sending emails. 
   

Collaborate with industry partners 

The aviation industry is a tight-knit community. Building relationships and collaborating with trusted partners, such as financiers, brokers and attorneys, can help identify potential issues early on and ensure a smoother transaction process. The experience of other NAFA members can provide practical examples of avoiding bad actors in future transactions.  

Within your company, encourage team members at all levels to raise concerns when something doesn't feel right. This promotes a culture of collaboration, where asking questions and slowing down a deal, if necessary, is encouraged and supported.  

Stay vigilant throughout the transaction  

Due diligence should not be a one-time exercise. Continuously monitor and update information on clients, even if they are repeat customers. Validate information through multiple sources, and don't hesitate to reach out to industry partners for input.  

For example, if you have a repeat client, it doesn’t mean the same client will be free and clear of any issues in the next transaction. In all cases, conduct due diligence and collaborate with other NAFA members if they are knowledgeable in your transaction.  

Final Thoughts 

The NAFA webinar "Tips for Avoiding Bad Actors in Aircraft Transactions" was a powerful reminder that vigilance, collaboration and a commitment to appropriate due diligence practices are essential in combating fraud and maintaining the integrity of aircraft transactions and the aviation industry.  

The first step to avoiding bad actors is raising your hand when something seems wrong.  Recognizing and examining red flags can make a difference in a clean aircraft transaction. In addition, by understanding the risks and costs associated with fraudulent transactions and fostering a culture of collaboration and due diligence, industry professionals can effectively mitigate the dangers posed by bad actors. 

Collaboration among industry partners is crucial in identifying potential issues early on and ensuring a smoother transaction process. By building relationships with trusted financiers, brokers, attorneys and other NAFA members, individuals can leverage the collective experience and knowledge of the aviation community to navigate complex transactions and avoid pitfalls. 

Ultimately, due diligence should be ongoing throughout the entire transaction and beyond. By continuously monitoring and updating information on clients, validating information through multiple sources and maintaining open lines of communication with industry partners, professionals can stay one step ahead of potential fraudsters. All stakeholders should remain committed to upholding the highest standards of integrity and transparency in aircraft transactions. 

About NAFA:  
The National Aircraft Finance Association (NAFA) is a professional association that has been promoting the general welfare of aircraft finance for over 50 years. Our network of members is comprised of lenders and product service providers who work together to finance general and business aviation aircraft. NAFA sets the standard for best practices in aviation finance by educating its members on the most up-to-date industry trends and best practices. Government legislation, market influences, and industry insights allow member companies to provide the highest quality services the industry has to offer.  

Working in aircraft transactions takes specialized knowledge, and it’s important to mitigate exposure to risk whenever possible. No matter what part of the process you’re involved in, there’s potential for something important to slip through the cracks. Due diligence and transactional integrity are crucial concepts that can bring to light transaction risk and ensure ethical, transparent deals. Let's break them down: 

What is transactional integrity? 

Transaction integrity emphasizes conducting deals with fairness and transparency. All parties involved with a transaction should provide and receive accurate and complete information, and the transaction should adhere to ethical standards. This includes:   

• Disclosure of all material information: No misrepresentation of facts or hiding of crucial details. 

• Compliance with regulations: Adhering to all applicable aviation and financial regulations (for a breakdown of common regulators, see our previous article). 

• Avoiding conflict of interest: Identifying and managing potential conflicts of interest to ensure unbiased decision-making. 

• Anti-corruption measures: Implementing measures to prevent bribery and other corrupt practices. 

What is due diligence? 

Due diligence is the comprehensive investigation conducted before entering into any aviation transaction, such as buying or selling aircraft, securing financing or forming partnerships. It involves thoroughly examining various aspects to mitigate risk and to make informed decisions. 

• Legal and financial analysis: Examining legal documents, contracts, financial statements and compliance with regulations. 

• Operational assessment: Evaluating the aircraft's airworthiness, maintenance records and operational history. 

• Market research: Understanding market trends, comparable valuations and potential risks associated with the markets in which the aircraft will operate. 

• Background checks: Investigating the parties involved in the transaction, including their reputation, source of funds and legal standing. This includes investigating the parties directly involved in the transaction and their links to potential bad actors through business relationships or their likelihood to participate in activities forbidden by regulators. 

Why are these important areas of focus for all professionals working with aircraft transactions? 

• Mitigate risk: Thorough due diligence can identify potential problems early, preventing costly mistakes and legal issues. 

• Streamline the transaction: Good front-end due diligence can help prevent time-consuming surprises later in the process. 

• Protect assets: Transaction integrity safeguards investments and promotes ethical business practices in the aviation industry. 

• Build trust and credibility: Transparency and fairness foster trust between the parties involved, leading to stronger relationships and long-term success. 

By prioritizing due diligence and transaction integrity, the aviation industry can create a safer, more reliable and more ethical environment for all stakeholders. NAFA's Transactional Integrity Working Group was established to educate members about the risk of fraud, which can occur at any stage of a transaction, and provide resources that could help mitigate the risk as well as avenues to report it.  If you experience any issues that you think our membership should know about, please email Fraud@NAFA.aero and our committee will review your submission and consider how best to use the information while maintaining confidentiality for the party reporting. 

Want more information and resources on transaction integrity? Join NAFA and gain access to valuable tools, insights and a network of top aircraft finance and law professionals. Stay ahead of the curve in transaction integrity—become a member today! 

This article was published by NAFA on May 10, 2024.

Due diligence is the responsibility of everyone involved in a transaction. No matter what part of the deal you are part of, it’s your job to watch out for red flags, evaluate them and address them to ensure you, your customer and your company can mitigate potential risk.

NAFA’s latest webinar provided essential knowledge to identify potential risks and red flags associated with bad actors in aircraft transactions. When you watch this webinar, you will learn:

• The reality of compliance risks in general aviation transactions, including real-world examples. 
   
• Red Flags to Watch For: Learn how to spot warning signs that could indicate involvement with drug smuggling, money laundering, or improperly imported/exported aircraft.
   
• Protecting Yourself: We'll explore the steps you should take if you encounter a red flag during a transaction.
   
• Due Diligence Demystified: Discover how to conduct effective due diligence, determine the appropriate level of investigation, and understand your exposure as a seller, buyer, or broker.
   
• The Power of Beneficial Ownership: We'll explain why identifying the true owner(s) of an aircraft is crucial and how hidden ownership structures can be used to mask risk.

This webinar is perfect for:

• Aircraft buyers and sellers
• Aviation brokers and intermediaries
• Lenders and financiers involved in aircraft transactions

Don't miss this opportunity to gain valuable insights and protect yourself from costly mistakes! 

 Click here to watch webinar

NAFA thanks our webinar sponsors TVPX and Holland & Knight.  

This NAFA webinar aired on May 2, 2024.

Maintaining transaction integrity is an important part of our role in aircraft transactions, and doing our due diligence on our customers is critical to minimizing risk and maintaining compliance with all our regulators. In our recent webinar, sponsored by TVPX, NAFA members Laura Martino and David Hernandez dig into due diligence and how you can mitigate risk by understanding your regulatory bodies and how to protect yourself and your company. 

So who are the regulators, what are the guidelines, and how do you ensure your transactions are compliant? Of course, you have the Federal Aviation Administration (FAA) and U.S. Department of Transportation (DOT), but you also need to be compliant with the Office of Foreign Asset Control (OFAC), the Financial Crimes Enforcement Network (FinCEN), the Securities Exchange Commission (SEC), the U.S. Department of Justice (DOJ) and more. Noncompliance with any of these regulators can lead to fines, reputational damage, debarment, disgorgement, criminal charges, suspension or denial of import/exports, seizure of assets, and more. 

Here, we'll shed light on some key U.S. regulators. Understanding their mandates and potential risks can help you minimize risk in your aircraft transactions. 

1. OFAC: Enforcing Economic Sanctions 

OFAC, nested within the U.S. Treasury Department, enforces economic sanctions against individuals and countries deemed threats to national security or foreign policy. These sanctions restrict U.S. dealings with entities in adversary states, or involved in terrorism, drug trafficking, and other illicit activities. 

Key points to remember: 

• Relevant Legislation: Trading with the Enemy Act, International Emergency Economic Powers Act 
• Focus Areas: 
  • Country-based sanctions: Cuba, Iran, North Korea, Syria, Crimea, Russia 
  • List-based sanctions: Specially Designated Nationals (SDNs) like individuals or groups linked to terrorism or drug cartels 
• Your potential areas of risk: 
  • Strict liability: Unintentional mistakes or omissions can lead to penalties 
  • Secondary sanctions: companies that are sanctioned because they do business with a state adversary 
  • Sanction evaders: non-US companies that we currently do business with that may ignore U.S. sanctions and then later become SDN 

Resources:  

• OFAC Website 
• Trading with the Enemy Act 
• International Emergency Economic Powers Act 

2. Financial Crimes Enforcement Network 

FinCEN, also under the U.S. Treasury Department, combats money laundering, terrorist financing, and other financial crimes. It ensures the U.S. financial system's integrity by preventing illegal funds from entering it.  

Key points to remember: 

• Relevant Legislation: Bank Secrecy Act, Money Laundering Control Act, U.S. Patriot Act, Corporate Transparency Act 
• Focus Areas: 
  • Money laundering: the use of transactions to obscure the origin of ill-gotten gains 
  • Terrorist financing: money funding terrorist activities and entities 
  • Customer Identification Programs: ensuring covered financial institutions have robust programs identifying and verifying customers  
• Your potential areas of risk: 
  • Partial owners of a company: identity the ultimate beneficial owner (UBO) of a company to determine risk of illicit activity 
  • Accepting laundered money or participating in transactions that launder money 

Resources: 

• FinCEN Website
• Bank Secrecy Act 
• Money Laundering Control Act 
• U.S. Patriot Act 
• Corporate Transparency Act 

3. Securities Exchange Commission and Department of Justice 

The SEC and DOJ share responsibility for enforcing anti-bribery laws, specifically the Foreign Corrupt Practices Act (FCPA). This act prohibits bribing foreign officials to gain business advantages. 

Key points to remember: 

• Relevant Legislation: U.S. Foreign Corrupt Practices Act (FCPA) 
• Focus Areas:
  • Third-party intermediaries: Using them for improper payments can violate the FCPA. 
  • Gifts to politically exposed persons (PEPs): Offering excessive gifts to PEPs can be seen as bribery. 
  • Lack of internal controls: Inadequate oversight can increase bribery risks. 
• Your potential areas of risk:
  • Inappropriate gifts to clients/customers that could be considered bribery. 
  • Strict liability: Unintentional mistakes or omissions can lead to penalties.

Resources: 

• SEC website 
• Foreign Corrupt Practices Act 

4. Bureau of Industry and Security 

The Bureau of Industry and Security (BIS), under the Department of Commerce, regulates the export of sensitive goods and technologies to safeguard national security and foreign policy interests. This involves managing the Export Control List (ECL) and enforcing the International Traffic in Arms Regulations (ITAR). 

Key points to remember: 

• Relevant legislation: Export Control Reform Act (ECRA), Export Administration Act (EAA), International Emergency Economic Powers Act (IEEPA) 
• Focus areas: 
  • Export licensing for controlled items on the ECL, categorized by industry and potential military or dual-use applications. 
  • Enforcing ITAR, which regulates the export of defense articles and services. 
• Noncompliance risks:  
  • Civil and criminal penalties 
  • Export denial 
  • Seizure of goods 
  • Reputational damage 

Resources: 

• BIS Website  
• Export Control Reform Act 
• Export Administration Act 

5. Federal Aviation Administration/Department of Transportation 

The Federal Aviation Administration (FAA), under the Department of Transportation (DOT), plays a crucial role in regulating air travel and ensuring the safety of our nation's airspace. They establish and enforce various regulations for aircraft operations, pilot licensing, maintenance standards, and airport safety, among others. 

Key points to remember: 

• Relevant legislation: Federal Aviation Act of 1958, various amendments and regulations 
• Focus Areas:
  • Aviation safety: Setting and enforcing safety standards for aircraft design, operation, and maintenance. 
  • Pilot licensing and training: Establishing requirements for pilot certification and conducting training programs. 
  • Air traffic control (ATC): Managing the flow of air traffic to ensure safe and efficient movement of aircraft. 
  • Airport safety: Overseeing airport safety standards and inspections. 
  • Consumer protection: Enforcing regulations regarding airline marketing, baggage handling, and passenger rights. 
• Noncompliance risks: 
  • Civil and criminal penalties for individuals and companies 
  • Grounding of aircraft 
  • License suspension or revocation 
  • Reputational damage 
  • Potential for accidents and loss of life 

Resources: 

• FAA Website 
• Department of Transportation Website 

6. U.S. Customs and Border Protection 

Customs and Border Protection (CBP), within the Department of Homeland Security, plays a crucial role in securing U.S. borders and facilitating legitimate trade. They enforce various regulations related to imports and exports, including anti-dumping and countervailing duties.  

Key points to remember: 

• Relevant Legislation: Tariff Act of 1930, Trade Facilitation and Trade Enforcement Act of 2015, various trade agreements with specific countries 
• Focus Areas: 
  • Enforcing import and export laws and regulations. 
  • Collecting customs duties and taxes. 
  • Preventing the entry of illegal goods and people. 
  • Facilitating legitimate trade and travel. 
• Your potential areas of risk:  
  • Misclassification or failure to declare goods 
  • Incomplete or inaccurate documentation 
  • Sanctions violations 
  • Improper or missing licenses/permits 

Resources: 

• CBP Website 
• Tariff Act of 1930 
• Trade Facilitation and Trade Enforcement Act of 2015 

7. State DDC - ITAR 

The Directorate of Defense Trade Controls (DDTC), part of the State Department, implements the International Traffic in Arms Regulations (ITAR) alongside BIS. ITAR governs the export, import, and brokerage of defense articles and services. 

Key points to remember: 

• Relevant legislation: International Traffic in Arms Regulations; The Export Administration Act; The Arms Export Control Act; The International Emergency Economic Powers Act 
• Focus areas: 
  • Licensing the export, import, and brokerage of defense articles and services. 
  • Registering companies involved in ITAR-controlled activities. 
  • Technical assistance agreements related to defense articles. 
• Your potential areas of risk: 
  • Failing to register  
  • Lack of technical data licenses or uncontrolled technical data 
  • Inadequate foreign disclosure management 
  • Improper recordkeeping and documentation 
  • Not vetting third-party vendors 
  • Changing regulations 

Resources: 

• DDTC Website 
• ITAR Basics 
• Arms Export Control Act  

How to mitigate risk 

Following compliance guidelines of all regulators is a critical piece of ensuring transaction integrity. Thorough and proper due diligence is your responsibility and the most effective way to minimize risk and ensure your business only engages in ethical and transparent transactions.  

• Read and understand the legislation related to aircraft transactions 
• Know your customer: thoroughly investigate their identity and affiliations before and throughout a business relationship 
• Understand the true ownership of the companies you work with, and the source of their wealth  
• Keep tabs on that company’s dealings that could potentially lead to sanctions or be connected to money laundering or other financial crimes 
• Have a robust compliance and training program 
• Walk away from a bad deal 
• Seek professional guidance 
• Build sanction-related language into your contracts  

By understanding these key regulators and their areas of focus, you can navigate the compliance landscape with greater confidence and protect your business from unnecessary risks. This blog is for informational purposes only and should not be considered legal advice. Always consult with qualified legal and compliance professionals for specific guidance. 

NAFA is committed to raising awareness and providing education to support transaction integrity in the industry and preventing fraud. Stay tuned for more webinars, articles and opportunities for you to learn more or get involved. Share these resources with your friends and colleagues and help ensure we all can do business as safely and transparently as possible.  

This article was published by NAFA on February 12, 2024.

Navigating the intricate landscape of US aviation regulations can feel like piloting through a blind fog, but due diligence is more important than ever. This NAFA members-only webinar, led by seasoned experts from NAFA member companies, will help you understand what to look out for and how to practice due diligence in your aircraft transactions. 

In this webinar, expert contributors Laura Martino, Jeff Towers and David Hernandez will discuss: 

• A deep dive into US regulatory agencies: Demystify their objectives, enforcement powers, and impact on your operations 

• The importance of due diligence in your transactions: Understand how it safeguards your investments, decreases legal risks and promotes smooth, compliant flights. 

• How to spot red flags: Learn to identify hidden dangers lurking in aircraft histories, operator practices and potential regulatory breaches. 

• Risk mitigation strategies: How to plan for the worst when navigating the ever-evolving regulatory landscape. 

 View Webinar