Fraud Mitigation Now an Essential Tool in Every Aircraft Transaction
The following article is from the NBAA “Business Aviation Insider” July/August 2022 and features comments by Aerlex President Stephen Hofer.
The heightened interest in business aviation borne from the COVID-19 pandemic has introduced a new generation of users to the many benefits of the industry. This influx of new owners, however, has also attracted the unwanted attention of criminals, who see an opportunity to use the complexities and nuances of aircraft transactions to defraud the uninitiated.
“You start with the realization that there is no such thing as a simple aircraft transaction, and the dramatic decrease in worldwide inventory and incentives like U.S. bonus depreciation have sparked an unprecedented buying frenzy and a willingness on the part of many to do whatever it takes to get the deal done,” says Stephen Hofer, president of Los Angeles-based Aerlex Law Group. “If you throw caution to the wind, you expose yourself to the risk that unscrupulous characters will try to exploit your impatience,” he warned. “Cyber criminals have realized that private aviation transactions present a great opportunity for theft and fraud, and they will poke, prod, push, pounce, punch and pummel in an effort to puncture, pierce and penetrate your purchase.”
This new reality is compounded by the growing number of inexperienced and unvetted parties becoming involved in aircraft transactions, especially as buyers increasingly look beyond the U.S. market to source aircraft, says Oklahoma City-based Scott McCreary, shareholder and practice group leader at McAfee & Taft.
“Aircraft transactions involve a lot of parties. This provides many opportunities for criminals to introduce themselves into a transaction, especially with the modified techniques we have seen used in recent years,” explains McCreary. “Beyond the seller and buyer, you typically have brokers, lenders and attorneys for both the buyer and seller, as well as escrow agents, management companies, maintenance facilities and pilots. If it’s a back-to-back transaction, you now multiply that by two, and if it is an international transaction, you add yet more involved parties. This provides many opportunities for criminals to introduce themselves into a transaction, especially with the modified techniques we have seen used in recent years.”
Fraud in Aircraft Sales Is Not New
While fraud is uncommon, it is not a new phenomenon in aircraft transactions. Indeed, the issue has drawn the attention of the U.S. Government Accountability Office, which in 2020 issued a detailed report containing 15 recommendations for the FAA to stem the illegal registry of general aviation aircraft. That report noted the vulnerabilities of the FAA’s self-certification of registrants’ eligibility and the risks associated with the FAA not verifying applicant identity, ownership and address information.
The GAO report also noted that opaque ownership structures employed by some aircraft owners further limit the transparency into the actual beneficial owner and heighten the possibility that an aircraft transaction could be used for money laundering or other illegal activities.
Hacking or theft phishing has also been a perennial – albeit rare – issue, although this method of fraud, too, has become more sophisticated. Where criminals once attempted to defraud buyers at the final payment point of a transaction, they are increasingly attempting to steal at the escrow stage.
“These individuals have total knowledge of the transaction,” notes William Clark, partner at YYZlaw in Toronto, Canada. “They appear to have access to all the documentation, and they wait for the right moment to change the direction of the flow of funds. These individuals are deeply knowledgeable: they set up dummy companies with real IP addresses that look remarkably similar to the IP addresses of legitimate parties to the transaction. These individuals wait patiently, monitoring the transaction until exactly the right moment to strike.”
Filing Fraudulent Documents
Another fraud is less clandestine. Sometimes criminals will file fraudulent documents with the FAA claiming to be the rightful owner of an aircraft, and then use those filings to transfer the aircraft’s title. This can go unnoticed, especially when the lawful owner has physical possession of the aircraft. This type of fraud will hinder any future attempt to sell that property and could result in costly and time-consuming court actions.
Owners should also be wary of nefarious parties placing unwarranted financial claims on their aircraft. Here, a criminal will file documents with the FAA or the international registry falsely claiming unpaid contracts to stall the completion of an aircraft transaction. This delay will then be used to extort money.
“This is straight out blackmail,” notes Clark, adding that recent changes made by the international registry have made it more difficult to register these types of non-consensual interests on an aircraft.
One fraud that has risen in prominence is associated with sanctions compliance. Recent international actions related to Russia’s invasion of Ukraine have impacted the sale of business aircraft, and buyers should beware of attempts to obscure the ultimate beneficial owner in any new purchase, especially on aircraft registered outside the U.S.
Sanctions busting, even if unintentional, can have a damaging effect on a buyer, both financially and reputationally, says McCreary. But the aviation industry is fighting back. “Efforts by organizations like NBAA to educate the community are having an effect,” he adds, “and thankfully the industry is willing to listen.
Proactive Measures to Prevent Fraud
In addition to these efforts, all parties to an aircraft transaction can take their own measures to restrict the potential for criminals to defraud,” says McCreary.
The most important step any buyer or seller can make is to hire knowledgeable, experienced and reputable people.
“Today, transactions can close extremely fast, but if you don’t know what steps need to be taken or what the outcome of that action should be, there is a huge potential for problems,” says William Clark, Partner, YYZlaw. “Experienced attorneys, brokers and escrow agents will not skip any steps and will enforce the rule of KYC – Know Your Client – by performing the appropriate level of due diligence.”
Due diligence is critical in any aircraft transaction, and each authority has its own rules that aircraft transaction novices could fail to interpret correctly, adds Clark. “You need someone who knows what they’re doing in each jurisdiction, especially where there are no aircraft title registries.”
“Seasoned professionals will also be aware of complex and ever-changing sanctions,” notes Aerlex Law Group’s Hofer.
Detailed Documentation Important
Each party to an aircraft transaction should require all documentation to provide as much detail as possible from the beginning of the deal, as requests for some information may not be contractually enforceable later.
“If people are reluctant or unwilling to provide KYC information like passports and copies of a driver’s license, I would say that is a big red flag,” says Clark.
Buyers should also request title documents for every owner since the manufacturer delivered the aircraft. This may not yield every document, notes Clark, but it should provide the buyer information critical to deterring fraud. It also helps if all parties provide details for the wire transfer, bank accounts and loans early in the transaction to provide sufficient time to confirm the legitimacy of each action.
An aircraft inspection is another valuable tool to mitigate potential fraud. “It helps to ensure everything is in order,” says McCreary. “Also, don’t limit this to a physical inspection. Pilots and maintenance facilities sometimes know as much about an aircraft’s history than anyone else.”
Buyers should also be wary if another party introduces urgency into the transaction, notes Hofer. “If a last-minute change is made to the wire transfer or escrow payment, take a step back and reflect on why this request is occurring and why it is necessary,” he advises.
“To be prudent, these days, you should work on the assumption that someone outside the transaction is monitoring your deal and simply looking for the appropriate moment to try and do something nefarious,” says Hofer.
To view the original article, please click here.
For further information, please contact Steve Hofer at shofer@aerlex.com or 310-392-5200.