The United States, the European Union (EU), the United Kingdom (UK) and many other countries have imposed similar but not necessarily identical sanctions on Russia. In business aircraft transactions, the sanctions laws of multiple jurisdictions may be involved.

Export control sanctions and restrictions affecting aviation

Sanctions and export control restrictions affecting aviation include:

• Sanctions blocking assets and prohibiting transactions with certain Russian companies and individuals, as well as property that these companies and individuals own or control. The United States Treasury Department’s Office of Foreign Assets Control (OFAC) has designated a number of these individuals as Specially Designated Nationals (SDN). In addition, the US Department of Justice (DOJ) has created the KleptoCapture Task Force, which aims to seize assets from SDNs, and other countries are also actively seeking to seize assets (including aircraft and yachts) owned by sanctioned oligarchs.
• Export controls generally prohibit the export or re-export of civil aircraft and parts to Russia or intended for use in Russia. Although there are some exceptions for non-Russian airline flights to Russia, since March 2, 2022, any flight to or from Russia of an aircraft owned, operated, chartered or leased by a Russian national would violate U.S. export control laws. To date, the US Department of Commerce has identified about 150 Russian-operated aircraft (mostly commercial aircraft) that have violated these laws.
• Many Russian banks have been designated as SDNs and/or blocked by the laws of other countries, while some Russian entities have been targeted with more limited sanctions. This means that remittances involving Russian entities that pass through Russian banks may be blocked or rejected by Western banks.
• Airspace restrictions limit flights between Russia and certain countries, as well as the operations of certain Russian persons in national airspace. In the United States, the Federal Aviation Administration (FAA) has clarified that this latest restriction only applies to aircraft owned, leased or chartered to Russian nationals who have been identified on a list of prohibited entities and not to all Russians. EU and UK restrictions are much broader.
• EU and UK sanctions prohibit the leasing or insurance of aircraft for use in Russia, as well as the provision of maintenance or technical assistance for aircraft owned or operated by Russian nationals.
• On May 8, 2022, the United States prohibited U.S. persons from providing accounting, trust, and company incorporation or management consulting services to anyone located in Russia effective June 7, 2022, in addition to demand an end to existing relationships. In addition, OFAC has determined that non-US persons could be sanctioned for providing these services to people in Russia, even if there is no connection to the United States.

Red flags in aircraft transactions

In international air transactions, buyers, brokers and lawyers should be on the lookout for information indicating a Russian connection. Some red flags that may warrant further investigation are:

• the aircraft is sold without the benefit of an inspection or test flight, which may be evidence that the aircraft manufacturer, operator or others have ceased to provide assistance for the ‘aircraft
• consecutive transactions where the beneficial ownership of the current owner is not fully disclosed
• a recent transfer of ownership between related parties or a recent change of register without a bona fide sale to a third party
• funds from or to be transferred to persons other than the parties to the transaction
• the aircraft’s past flight history shows numerous flights to or within Russia prior to the imposition of sanctions on February 24, 2022, or that the aircraft flew to a neutral country such as the United Arab Emirates (UAE) shortly after sanctions were imposed and has not flown since

Such red flags do not necessarily mean that the transaction cannot proceed, but rather warrant increased due diligence to ensure that the transaction does not violate sanctions and that the buyer can take good title and receive assistance for the plane after closing.

Steps parties can take to protect themselves

Where there are red flags or other risk factors, parties should certainly include additional contractual protections and representations regarding penalties. However, such representations do not constitute due diligence and will not protect a party from liability. Rather, it is essential for a party to perform and document enhanced due diligence which may include the following examples.

• Most Russian aircraft are owned by non-Russian companies and are not registered in Russia. Therefore, it is essential to determine who is the ultimate beneficial owner (UBO) of the aircraft, as well as the other parties to the transaction (eg lessors, banks used, etc.). These parties should be checked not only against OFAC’s SDN list, but also against other relevant sanctions and export control lists. Although parties to consecutive transactions may be reluctant to provide such information, adequate non-circumvention and confidentiality provisions can be put in place to assuage commercial concerns.
• If this is not apparent, confirm with the aircraft and/or engine manufacturer that the aircraft will be supported, as manufacturers may have frozen support for the aircraft pending further sanction review.
• Understand where money is coming from and where it is flowing, including intermediary banks.
• Check flight history to ensure that the aircraft was not operated in violation of US export laws and therefore subject to export restrictions.
• Given the rapidity with which penalties evolve, it is essential to exercise due diligence not only at the start of the transaction, but also immediately before taking delivery.

Will the US government help?

The sanctions target Russia and certain Russian individuals, and the U.S. government has shown a willingness to assist U.S. citizens and others, particularly where such assistance will remove assets from Russian hands and in the interests of security. Aerial.

• If the aircraft is beneficially owned by an unsanctioned Russian national or dual Russian/third country national and based outside of Russia, the Department of Commerce may, upon request, issue an advisory opinion that the United States and others may service, maintain, or operate the aircraft.
• If the aircraft has been involved in export violations, then legally it is tainted, which means that no American person can buy, sell, maintain or operate the aircraft if it has knowledge of such violation. However, the BRI can issue a waiver if the aircraft is removed from Russia, for example in the event of repossession by a lessor or lender. This also requires the submission of a parallel voluntary disclosure of the breach.
• Where the aircraft is or was beneficially owned by an SDN, it is highly likely that an OFAC license will be required to complete the transaction. In such circumstances, the sale proceeds should be placed in an escrow account rather than remitted to the SDN. OFAC interprets the “ownership interest” of an SDN broadly. For example, in a back-to-back transaction where the buyer purchases the aircraft from an unsanctioned middleman, the second transaction would also be subject to the blockage.

Risks associated with transactions involving Russian-owned aircraft

There are legal and practical risks against which strong due diligence can mitigate. In addition to reputational damage, a party may be strictly liable for civil or other penalties, and in the United States there are criminal penalties for intentional violations. In addition, the aircraft itself could be seized by authorities, for example, when entering the United States. In such circumstances, the asset could be confiscated unless the new owner can prove that he was a bona fide purchaser who did not know (after due diligence) that the aircraft was unclean property. Similarly, fund transfers could be blocked by banks when an SDN is directly or indirectly involved in a transaction.

This alert provides a high-level overview of the sanctions as of May 10, 2022. It is not legal advice, and parties are advised to consult their attorney as these export control sanctions and restrictions are complex, specific to done and fast. changing.