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Moratorium Alert - Non-Citizen Trusts

The FAA, in a move that would not have been surprising in late 2001 but which is somewhat mystifying in the present, recently issued a [temporary] moratorium on the use of Non-Citizen Trusts to enable FAA registration of aircraft. Ostensibly, the administration apparently believes that terrorists, or supporters of terrorists could (or do?) use Non-Citizen Trusts to register and then have direct access to aircraft that travel, essentially unfettered, in U.S. airspace.

AvBuyer   |   9th July 2010
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By Stan Yockey
Are they really a potential terrorist safe haven?

The FAA, in a move that would not have been surprising in late 2001 but which is somewhat mystifying in the present, recently issued a [temporary] moratorium on the use of Non-Citizen Trusts to enable FAA registration of aircraft. Ostensibly, the administration apparently believes that terrorists, or supporters of terrorists could (or do?) use Non-Citizen Trusts to register and then have direct access to aircraft that travel, essentially unfettered, in U.S. airspace.

Although this practice has been ongoing for many years under the auspices of 14 C.F.R. §47.7(c)(3), the reaction of many in the business aviation industry has been that the issuance of the moratorium – which presumably intends to prevent money laundering and/or aircraft operation by individuals or organizations with less-than-honorable intentions – was clumsy, untimely, and generally ill-advised. Fortunately, due at least in part to the efforts of the National Business Aviation Association and the Association of Aircraft Title Lawyers (AATL), the moratorium has been rescinded pending further review and dialogue.

Make no mistake, however: we haven’t heard the last of the issue, so it’s important that some of the practical aspects of such a moratorium, presumably followed by a change in regulation going forward, be addressed methodically and dispassionately. Not doing so could result in the FAA proceeding with its initial plan, the result of which would be an immediate and potentially devastating impact on the business aircraft industry in the US and, in parallel, in many other countries.

To give context to the issue, the real and practical potential impacts to existing aircraft ownership, operation, and registration, communicated by the AATL to the FAA’s Director, Joe Standell, include, but are likely not limited to:

• …impact [to] insurance coverage for the owners, operators, passengers, lenders, lessors and other insured parties;
• …cause[ing] a lender or lessor’s legal perfection in its collateral to be lost;
• …trigger[ing] a default under essentially all leases and security agreements that cover aircraft registered through Non-Citizen Trusts;
• …[leaving] aircraft lenders and lessors [with] few options other than to ground aircraft until the issue is resolved; and
• in general, creating havoc among current registrees and future prospective owners who have traditionally utilized FAA registration to manage their assets within appropriate legal parameters, as well as to maintain the value of the asset in the process.

Further, in turn the AATL avers that a regulatory change could:

• Result in foreign purchasers having no legal or economically justifiable way to move aircraft outside of the U.S. after they have purchased the aircraft, thus adversely impacting aircraft sales of U.S. aircraft and increasing illegal operations;
• Adversely impact U.S. aviation and lending industries and ultimately the employment of U.S. workers in the aviation industry;
• Create an unfavorable environment for international companies that may result in the loss of U.S. business and investment to other countries; and
• Create uncertainty for those in the US…manufacturing, financing, leasing, selling and purchasing aircraft.

ACTION IS CRITICAL

Even though the FAA has rescinded or stayed the moratorium, industry action in support of the AATL is critical. To start with, aviation lawyers, manufacturers, brokers and consultants need to work together and with the FAA and other regulatory agencies (most likely including, but not limited to, the U.S. Homeland Security Department) re-define the guidelines and procedures leading to registration in such a way as to address the FAA’s and HSD’s security concerns without revoking existing, or preventing future non-citizen trust registrations.

One approach could include carefully defining the ‘source-of-wealth’ and ‘money laundering prevention’ due diligence elements of the U.S. Patriot Act (which U.S. aircraft manufacturers are already required to uphold in the process of selling aircraft) such that brokers, attorneys, and, possibly, lenders can effectively make such disclosure an essential part of an aircraft purchase and registration transaction.

Then, the FAA needs to communicate the intent of, and rationale behind a regulatory change to other aviation authorities around the world in a logical and common-sense way, inviting feedback that could strengthen and/or improve the process and the end result without unduly or inappropriately impinging on the privacy or sensibilities of buyers/operators.

Separately, but in parallel, aviation professionals need to work with the FAA and other international aviation authorities to address a key issue that has been a challenge for years but which became glaringly painful when the non-citizen trust registration moratorium was issued: the disparity of airworthiness requirements between countries.

To explain, let’s say that an aircraft owner wants to sell his aircraft – manufactured in the U.S. and certified pursuant to the U.S. Federal Aviation Regulations (FARs), then operated and maintained in the U.S. in accordance with the FARs – to a buyer residing in China. Under the current regulations, the Chinese buyer can form a non-citizen voting trust through which to buy, register, and continue to operate and maintain the aircraft in accordance with the FARs, then re-sell the aircraft – all without the need to modify and re-certify the aircraft to CAAF requirements (at considerable extra time and expense).

Absent access to non-citizen voting trust registration, however, the aircraft would have to be removed from U.S. registry, modified and re-certified to Chinese requirements, then registered in China – with the entire process repeated in the second (and each subsequent) resale. Sure, aircraft modifiers and certifiers would enjoy a business windfall, but ultimately the entire process would become so cumbersome and expensive that it would have a hugely negative effect on business aviation – especially in the U.S.

Will aircraft buyers complain about having to honor U.S. financial disclosure regulations? Absolutely – many do now! But having the alternative presented to them – no transaction, or a transaction involving significantly increased cost, time and complexity – it usually becomes a non-issue for legitimate businesses and people.

So, unless the FAA’s motive is to continue the vilification of the business aviation industry, altering the regulations to prevent the use of non-citizen voting trusts to facilitate ownership and registration of business aircraft doesn’t make any sense to most of us in the industry.

This is especially true given the absence of any reported evidence (or, even, supportable suspicion?) that criminal or terrorist elements are abusing the regulations. So let’s all get together and get out in front of this potentially disastrous change. By working within our ranks and with our aviation authorities to understand the perceived problem, identify possible mitigations, corrections, or alternatives to existing rules that will address that problem, and craft real-world, we can help develop practical solutions and make sure that they are set-out in modified regulations that will not hurt our industry.

 

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