Although not specifically related to Russia, the agreement by the Office of Foreign Assets Control (OFAC) between it and the Apollo Aviation Group (Apollo) on the monetary compensation for the settlement of violations by Apollo of the Sudanese Sanctions Regulations that was announced on November, 7 2019, affects the aircraft leasing sector worldwide.
Based on the announcement, Apollo has agreed to settle its potential civil liability for 12 apparent violations of the Sudanese Sanctions Regulations. The alleged violations arose from Apollo’s lease of aircraft engines between 2013-2015 to an entity incorporated in the United Arab Emirates which were then sub-leased to a Ukrainian airline which subsequently installed the engines on an aircraft wet leased to Sudan Airways for use in Sudan.
Although Sudanese Sanctions Regulations are no longer in effect, they were in effect during the period referred to above, and Sudan Airways was identified on OFAC’s List of Specially Designated Nationals and Blocked Persons, and therefore the “exportation, reexportation, directly or indirectly, of goods, technology or services from the United States or by U.S. persons” to the entity was prohibited.
When considering the case, OFAC determined the following “aggravating factors”: (1) the violations resulted in harm to U.S. sanctions program objectives; (2) Apollo is a large and sophisticated entity”; and (3) Apollo failed to monitor or otherwise verify the actual usage and operation of the engines during the terms of the leases.
Although the lease agreements included provisions prohibiting the lessee from “maintaining, operating, flying or transferring the engines to any countries that are subject to U.S. and United Nations sanctions,” OFAC believes that Apollo did not ensure that the engines were used in compliance with OFAC’s regulations during the term of the lease. In other words, Apollo did not implement internal ongoing, up-to-date, and efficient sanctions-compliance-and-monitoring policies to reveal the violations in advance.
This case confirms the general understanding of the market that lessors can be held accountable for sanctions violations caused by their lessees and/or sublessees, even if the lessors are not in control of the aircraft or engines when the violation is committed. Another important outcome of the case for the lessors is that sanctions compliance monitoring is an ongoing process which shall be implemented during the term of the lease and not only prior to or at the time of execution of the lease agreements, and mere inclusion of the relevant sanctions compliance provisions in the lease agreements is not sufficient.
In the announcement, OFAC provided a number of examples of potential mitigation measures and of measures which could potentially satisfy compliance obligations of lessors against possible OFAC investigation, namely: (1) obtaining U.S. law export compliance certificates from lessees and/or sub-lessees; (2) periodic monitoring or other verification of the lessees’ and/or sub-lessees’ compliance with the provisions of the lease agreements, including those requiring compliance with sanctions legislation; (3) enhancement of “Know-Your-Customer” procedures in accordance with global best practice; and (4) U.S. export control training sessions for employees.
OFAC further set out the following mitigating circumstances which it considered in the instant case: (1) no Apollo personnel had actual knowledge of the violation or actions which led to the violations; (2) Apollo had not been penalized by OFAC in the five preceding years; (3) Apollo implemented a number of remedial measures in response to the violations, including implementation of additional compliance systems and hiring additional compliance personnel; (4) Apollo provided information to OFAC in a “clear, concise and well-organized manner”; and (5) Apollo voluntarily disclosed the violations to OFAC.
We believe that, in addition to the above mitigation measures, lessors may also further reduce risks by: (a) implementing and complying with specific due diligence procedures required to assess risks associated with the lessees and sub-lessees, (b) periodically monitoring the usage and operation of the leased assets to ensure that the lessees and/or sub-lessees actually comply with the requirements of the leases, including sanctions related provisions, and (c) familiarizing the lessees and/or sub-lessees with the internal sanctions compliance policies of the lessors and their affiliated entities.
Unfortunately, there is no clear and exhaustive list of mitigating-and-sanctions-compliance measures which will ensure full compliance with sanctions when leasing aircraft assets. However, we believe that in assessing clients, lessors should consider which measures are most appropriate and adequate in each particular situation in order to mitigate possible sanctions-related risks.
By Victoria Bortkevicha, Partner, and Vadim Turtsev, Senior Associate, Clifford Chance Moscow