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Copyright © 2013 Holland & Knight LLP All Rights Reserved International Sales: What You Should Know about U.S. Export and Embargo Laws (and how they are.

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Presentation on theme: "Copyright © 2013 Holland & Knight LLP All Rights Reserved International Sales: What You Should Know about U.S. Export and Embargo Laws (and how they are."— Presentation transcript:

1 Copyright © 2013 Holland & Knight LLP All Rights Reserved International Sales: What You Should Know about U.S. Export and Embargo Laws (and how they are changing) AVM SUMMIT Orlando, Florida November 22, 2013 Presented by: Jonathan Epstein Holland & Knight LLP 1.202.828.1870

2 Overview In general most civil aviation parts can be sold to most entities in most countries without a license However, certain transactions raise concerns: –Exports directly or indirectly to barred entities or sanctioned countries (e.g., Cuba, Iran, Syria, Sudan, and North Korea) –Exports of sensitive items: Military aircraft/system parts Inertial navigation units Importance of having risk-based diligence procedures and training: –Potential penalties and costs if you inadvertently violate U.S. export/sanctions laws –U.S. enforcement officials have 20/20 hindsight 1

3 Where Do Export and Embargo Laws Fit into Diligence? Credit Risk Analysis Economic Sanctions & Export Controls Know Your Customer Negotiating Contractual Restrictions Reps/Warranties Anti Money Laundering Anti- Corruption (FCPA) Anti- Boycott 2

4 U.S. Export & Embargo Laws Complex Regulatory Environment U.S. Treasury Department Office of Foreign Assets Controls (OFAC) - Principal agency administering sanctions on Cuba, Iran, Syria, and Sudan - Administers the Special Designated Nationals (SDN) list of terrorists U.S. Department of Commerce Bureau of Industry and Security (BIS) –Governs export and re-export of most U.S.-origin goods U.S. Department of State –Responsible for certain extraterritorial sanctions on Iran –Responsible for aircraft, engines, parts on U.S. Munitions List U.S. Customs and Border Protection –Import/export clearance OVERLAPPING JURISDICTION – APPARENT AUTHORIZATION BY ONE AGENCY MAY NOT MEAN IT IS LEGAL (Sudan, military exports) 3

5 Who Is Subject to U.S. Jurisdiction for Export and Embargo Purposes? U.S. Persons –U.S. citizens and permanent resident aliens (green card holders) wherever located –Any entity organized under the laws of the U.S. –Any person or entity in the U.S. Entities owned or controlled by U.S. entities with respect to sanctions on Cuba and Iran (as of Oct. 9, 2012) Anyone in possession of U.S.-origin goods or technology (in rem jurisdiction over the U.S.-origin good) Anyone engaging in certain barred activities under certain extraterritorial sanctions imposed on Iran –Iran Air, Mahan Airways Anyone using the U.S. banking system 4

6 Export Administration Regulations (EAR) Administered by BIS Covers exports and re-exports of virtually all U.S. commercial goods and technology Commerce Control List (CCL) of goods restricted to certain destinations assigned Export Control Classification Number (ECCN) Licensing requirements based on classification of the goods and the destination (end-user/country) 5

7 U.S. In Rem Jurisdiction Over Foreign-made Aircraft Foreign-manufactured products containing more than de minimus U.S. controlled content: –10% U.S.-controlled content for re-exports to embargoed countries, such as Iran (25% U.S.-controlled content to all other countries) –De minimus rules do not apply to military items, certain inertial navigation chips Virtually all western large commercial aircraft in service are considered of U.S.-origin and thus subject to U.S. jurisdiction because they contain more than 10% U.S.-origin components (e.g., engines, avionics) –Presume that all Airbus, Bombardier, Embraer, BAE, and Boeing aircraft are of U.S.-origin –Presume that all GE, CFM, IAE, and Pratt & Whitney and Rolls Royce engines are U.S.-origin U.S. enforces these rules strictly on sale or lease of aircraft and aircraft parts 6

8 Export Control Classification Numbers (ECCNS) Most civil aircraft, engines, and specialized mechanical and structural aircraft parts fall under ECCN 9A991 –Only controlled for anti-terrorism (AT reasons) –Can be exported, re-exported to all but embargoed countries except: Barred entities Barred end uses –Black Box rule for classification of systems integrated into aircraft Most civil aircraft avionics fall under ECCN 7A994, similar controls to above Components subject to strict controls –Modern inertial navigation systems, and components (QRS-11) and related technology –Certain night vision technologies –Engine hot section technology (not the parts themselves) –Certain lightweight high-thrust turbojet engines (can be issue for very light jet market) because they fall under cruise missile/unmanned aerial system controls 7

9 Common Aircraft/Parts Classifications (ECCNS) Avionics (7A994) Certain Inertial Navigation Systems (7A003) Gyros (7A102) Accelerometers (7A103) Certain Altimeters (7A006, 7A106) Certain Indicators (7A107) Gyro Astrocompasses (7A004) Other Navigation Equipment (7A994) Radar (6A998) Communication Equipment (7A994) Night Vision Equipment (6A002, 6A992) Magnetic Tape Recorders (3A992, 3A002) Engine Components (9A991) FADEC Software (9D003) Airframe/Non-avionics Equipment (9A991) Test equipment (7B001, 7B102) Lifejacket, raft, etc. (8A992) General Purpose Electronic Equipment (Category 3) General Parts - nuts, bolts, etc. (EAR99) 8

10 Manufacturer As Good Source for Determining ECCN 9

11 Foreign Assets Control Regulations (FACR) Administered by OFAC Almost total embargoes on Cuba, Iran, Syria, Sudan, (North Korea) designated persons –U.S. persons cannot engage directly or indirectly in transactions with such countries or entities in such countries, or facilitate transaction by third country persons with such countries –Implication on international wire transfers in U.S. dollars Lesser embargoes on other countries –Burma, Belarus, Congo, Iraq, Ivory Coast, Lebanon, Liberia, Libya, North Korea, Zimbabwe, Somalia, Yemen Specially Designated Nationals (SDN) –Most major U.S. companies use third party service for screening –SDN list is only one of number of U.S. lists (entity list, denied persons list) 10

12 International Traffic in Arms Regulation (ITAR) Administered by the U.S. Department of State Directorate of Defense Trade Controls (DDTC) U.S. Munitions List (USML) controls defense articles, technical data, and defense services -- Generally speaking a license is required to export a USML item to any non-U.S. person –Transfer of registration (title) of a USML-controlled aircraft also requires authorization from DDTC –U.S. lessor may be required to register as an arms broker in order to hold title to an ITAR-controlled aircraft –Sikorsky S92 example When Are Civil Aircraft Subject to the ITAR? Historically, the specially designed rule/look through rule meant that: Aircraft equipped with anti-missile technology Helicopters with specialized deployable beacons 11

13 Export Reforms Effective October 15, 2013 USML will be positive list of combat aircraft, certain military gas turbine engines, and specialized military systems. Potentially some military aircraft and many less sensitive parts will move to the Commerce Control List (CCL) –Creates new ECCNs for military items that move off ITAR that will now require BIS licenses (600 series) –Certain subcomponents will be essentially fully decontrolled such as: Aircraft tires, analog cockpit gauges, galleys, lavatories, life rafts, and magnetic compasses for most military aircraft Oil tanks, fuel and oil filters, identification plates, and clamps for gas turbine engines Possible some USML civil aircraft could be reclassified under CCL Bottom line: Unlikely to significantly affect commercial aircraft leasing 12

14 Recent Changes in U.S. Sanctions Programs Burma/Myanmar –July 2012 – Sanctions on providing financial services and investment in Burma largely lifted. There are still an number of Burmese entities designated as SDNs, some for narcotics trafficking, including certain airlines and banks. Cuba –Early 2011 – Further relaxation of U.S. travel restrictions; expansion of ports of entry for travel to Cuba; increasing number of flights to Cuba. Libya –Broad sanctions imposed in February 2011 – These were lifted in stages in late 2011 and now transactions are generally allowed with Libya. Syria –Aug. 2011, Executive Order 13582 – Substantially expanded U.S. embargo of Syria. Now bars U.S. persons from providing any services to Syria. South Sudan –July 2011 – U.S. recognizes Republic of South Sudan – No longer subject to sanctions on Sudan. (North) Sudan – No major changes except for expansion of humanitarian shipment general licenses. 13

15 Significant Changes in U.S. Sanctions on Iran Export Import Bank Reauthorization Act of 2012 –Section 18 requires a certification that the recipient of financing, or any entity owned or controlled by recipient, does not engage in any activity prohibited under U.S. sanctions of Iran. –Much broader than other restrictions on prohibited countries, restricted countries that apply to the particular aircraft being financed. U.S. sanctions now apply to foreign subsidiaries of U.S. companies, and parent companies may be liable for its subsidiarys violations Extraterritorial sanctions increased Reporting requirements for publically traded companies 14

16 Vigorous Enforcement of U.S. Sanctions on Iran Aggressive enforcement of sanctions against entities that sell aircraft, engines, parts to Iran (directly or indirectly) –Criminal penalties up to $1 million per violation + 20 years jail time –Civil penalties $250,000 per violation or 2x of transaction Many third country aviation companies on barred entity lists: –AP Finance (UK)- Sky Wings (Greece) –Khors Air (Ukraine)-UM Air (Ukraine) –Austral Aviation (Malaysia)-Gatewick Aviation (UAE) –Mac Aviation Group (Ireland)-Zarand Aviation (France) –Iberair Lines (Spain)-Sirjanco Trading (UAE) –Skyco/Equipco (UK)-Sayegh Grp Aviation (UAE) –DFS Worldwide (UK, SA, UAE) Designation in rem of specific aircraft in September 2012 – A number of aircraft owned or operated by Iran Air, Mahan Airways, and YAS Air, designated by tail number and serial number. 15

17 16 Regulatory Subpoena

18 FBI/DOJ Actively Prosecuting Criminal Violations 17

19 Putting it All Together: How Much Should You Know About Your Customer and Parties to a Transaction? Due Diligence: Procedures & Training –Reasonable and practicable –Risk based assessment –How do you deal with parts brokers? Transaction Due Diligence –Entering into distribution agreement to sell aircraft parts to company in UAE Sales of individuals parts thereunder? –Sale of a part to a publically traded company Document the Diligence –If there is no documentation of diligence none was done –If you document defense that you lacked constructive knowledge Contract Sanctions Clauses – helpful but are not a substitute for due diligence 18

20 Screening Counterparties Specific requirements for certain financial institutions such as banks under the Patriot Act Screening must be programmatic – and done in a practical manner Screening of beneficial owners –March 2013 – FINCEN Advanced Notice of Proposed Rulemaking on screening on beneficial owners, as well as guidance on when to screen for beneficial ownership –Particularly where counterparty is special purpose vehicle –Any entity owned or controlled by an SDN is also an SDN Screening beyond official lists – World Check and similar commercial services –Politically Exposed Persons (PEP); Senior Foreign Political Figure (SFPF) When to Screen? –In some cases, months can pass between LOI & consummation of transaction –Distributor/broker purchases 19

21 Other Diligence Steps Dependant on risk profile Lower Risk: –Internet searches for public information –In-country searches from agent in local language –Business records for entity/parent entity Higher Risk Third Party Information –Third party reporting on shipments by business Require specific end-use certificate Obtain Dunn & Bradstreet Report World Check or similar custom report Hire Trace International Consult outside counsel 20

22 Red Flags Red Flag = Elevated Risk Transaction (Not that the deal is dead) –20/20 hindsight of enforcement agencies –Additional diligence and/or contractual representations may be sufficient to proceed –Important that red flags get reported up the chain Example New labels on Boxed Pipes Examples of Export/Embargo Red Flags: –Buyer is foreign air carrier that doesnt operate your type of aircraft –Payment terms are unusual or routed through third country –Parts buyer not familiar with parts being ordered, doesnt negotiate, or ask about warranties, airworthiness –Borrower, lessee strenuously object to export control restrictions in loan, lease –Third party information (including Google) Procedures for Clearing & Documenting Red Flags –Example: News report of vessel being sold to embargoed country 21

23 Questions 22

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