U.S. Government Continues to Focus on Aviation Exports

U.S. Government Continues to Focus on Aviation Exports

It is becoming increasingly important for our industry to pay attention to United States export laws. There are several reasons for this statement, including (1) the increase in export enforcement by the U.S. government, (2) the increase in attention being paid to aviation, and (3) the rapidly increasing number of aviation companies who are sanctioned under U.S. laws. Recent legal actions show that export violations can destroy an aviation business!

Export laws affect companies that are exporting aircraft parts but then can also affect repair stations whose customers are outside the United States. Returning an overhauled component from the United States to a non-U.S. customer is an export. A non-U.S. repair station may also be subject to U.S. export laws because it is “re-exporting” or “transferring-in-country” in each of its transactions.

Increased Enforcement

The United States government has been signaling for a while that it intends to increase the enforcement of the United States export laws. Several policy documents were published last year that warned about increased enforcement; more importantly, we spoke with representatives from various agencies, like the Homeland Security Investigations and the Bureau of Industry and Security, who let us know that they were actively pursuing investigations and enforcements.

An important focal area for increased enforcement is the set of sanctions targeting Russia and Belarus. There has been a tremendous effort to circumvent those sanctions, and U.S. aviation companies are getting caught in these circumvention efforts: often with no knowledge of the true destination for the parts.

I am an aviation lawyer and I have been providing export compliance support (and defense) to aviation companies for over twenty years so I can recognize patterns in my own interactions with the government that illustrate where the government is going in their enforcement regime. Through 2023, I was starting to see more and more seizures of aircraft parts by Customs and Border Protection (CBP). Many of these seizures involved companies that were not yet sanctioned in any formal way by the U.S. government. In many cases, this is a signal that those companies may be under investigation and that the U.S. government believes that the articles could be illegally diverted. In some cases, the target companies whose goods were seized in 2023 have since been added to either the BIS Denied Parties List or the OFAC Specially Designated List. Both of these are sanctions lists that forbid certain types of transactions (including exports).

Enforcement Against Aviation Businesses

Examine the U.S. sanctions lists and you are going to see a growing number of aviation businesses being added. In February, the Treasury Department added aircraft parts companies from Russia and from outside Russia to the list of specially designated nationals (SDNs). This includes aircraft parts companies in places like the United Arab Emirates. Last year, the government fined 3D Systems (an additive manufacturing company) $2.77 million for sharing export-controlled plans for aerospace components with a Chinese customer.

In some cases, the export sanctions are just part of the puzzle, with U.S. companies like Kanrus and MIC P&I, LLC, having been indicted under U.S. criminal laws. Kanrus is accused of selling avionics to Russia and also of managing repairs of avionics units from Russia. MIC P&I is accused of lying to aircraft parts suppliers about the end users and destinations for the aircraft parts it purchased, and then exporting the parts to Russian airlines through intermediaries.

Executives from both companies are facing potential for both fines and jail time in the criminal actions related to their alleged export offenses. In the MIC P&I case, the freight forwarder was identified as a specially designated national, which effectively precludes the freight forwarder from operating in, or out of, the United States.

Aviation as a Focus

Aviation was identified as a focus for increased export scrutiny. It is one of a small number of industries identified by the U.S. government as special areas of examination because of a belief that aircraft parts are being illegally exported to Russia. Exports arise somewhat frequently in aviation, whether it is sales and exports of new parts to customers, or acceptance, maintenance, and return of units from non-U.S. customers. For repair stations and those managing repairs in the U.S., it is important to recognize that even if you are merely returning the goods to the owner following work like an overhaul, the fact that the parts are crossing the U.S. border means that they are being exported and thus they are subject to all of the regulations that apply to exports (and when they are processed abroad there are re-export and transfer standards that still apply to many transactions).

One of those regulations is the foreign aircraft rule that is found at 15 C.F.R. § 744.7. If you are exporting an aircraft part for eventual installation on a foreign registered aircraft then this rule imposes additional restrictions and analysis requirements that effectively require the exporter to know the destination aircraft and its owner.

Luckily there are a number of very useful license exceptions that one can use to circumvent license requirements. In order to use those exceptions, though, you have to (1) know that you meet the requirements for the exception and (2) explicitly declare the exception in the electronic export information that is filed with the U.S. government (Looking for training on exports and export license exceptions? These topics will be covered at the ASA/AFRA annual Conference in Scottsdale in June).

The fact that exported goods are being seized before the customer has been added to a sanctions list is a problem for U.S. exporters. If you’ve extended credit to the customer then there is a strong likelihood that your customer will not pay you for parts that were seized by the U.S. government. But even if you were pre-paid for the goods, there is still a chance that your customer may seek a refund or even damages related to those seized parts. Even if the claims are specious, you could still find yourself expending resources to defend your company. Lately, we’ve been recommending a suite of protective measures to companies to protect themselves against illegal diversion efforts. We highlight two in this article.

Protecting Your Company

One measure we’ve recommended is a strong hazard identification and risk mitigation strategy. Your company needs to identify its appetitive for risk, but you also need to identify effective ways to mitigate that risk.

In the case of export sales, we’ve advised companies to carefully assess their customers (especially brand-new customers) for export risks. This can mean performing some background checks on customers to help identify whether they pose a potential risk of diversion. A risk of diversion is not a deal killer if you take steps to prevent diversion. For example, insisting on direct shipment to end users can mitigate the potential for harm from exporting to an unknown supplier. Having effective controls that will verify that the aircraft parts are installed on the expected aircraft can be useful. An effective background check can also help identify companies with whom you’d rather not do business in cases where you do not trust the potential business partner to conform to the legal requirements.

Another measure we’ve recommended is commercial controls to protect your company in the event of fraud or misrepresentation about the end use or end user. Getting paid in advance by customers to whom you are not willing to extend credit is a smart approach. The government has highlighted the fact that end use statements are sometimes completed fraudulently, so having a regular pattern of verifying end use statements is also a good idea. A risk mitigation strategy can include selling articles using the incoterms term “ex works” which means that risk of loss passes when the goods are made available at the named location (typically you would name your own location as the “ex works” location). When CBP seizes export goods at the U.S. border, if the paperwork is clear that you got paid and that risk of loss passed to the customer before the seizure, then it puts you in a more legally defensible position when you want to keep the money that was paid (because the transaction was complete when the aircraft part left your facility).