Improper export of aircraft is ‘coronavirus of business aviation’

Yves Le Marquand

The improper export of aircraft, such as those on the N-register, is “the coronavirus of the business aviation industry”, warns David M. Hernandez, shareholder and Global Transportation Finance practice group member, Vedder Price P.C. “And there’s no vaccine. You are either immune or you aren’t.”

Hernandez’s comments follow the indictment of Debbie Mercer-Erwin, the owner of Wright Brothers Aircraft Title Inc. and Aircraft Guaranty Corporation, after being accused of helping drug traffickers register aircraft in the US. Federal prosecutors have accused Mercer-Erwin, her daughter Kayleigh Moffett and six other individuals outside the company of seven different charges. They face charges of multiple drug-related offences, as part of a scheme to conceal ownership of foreign aircraft, according to indictments filed in Texas.

The indictments detail around $350m in alleged criminal activity around a Ponzi scheme since 2016.

Although surprised by the extent of the activities alleged, Hernandez told Corporate Jet Investor: “I am not surprised at all about the failure to properly export aircraft from the US. That has been an issue people have discussed for years.”

The unsealed court documents allege the defendants purchased and illegally registered aircraft under foreign corporations and other individuals for export to other countries.

Illegally registered aircraft

“There are three prongs [relevant to the industry],” said Hernandez. “Whether or not Wright Brothers ’trust was valid per the FAA regulations, whether or not they filed accurate aircraft registration documents with the FAA and whether or not these aircraft in trust were exported properly.”

Hernandez added: “That third prong applies to virtually every aircraft sold in the US and exported. What’s deceptive is that people think that because they are keeping their aircraft on the N-register, and they are not getting an Export Certificate of Airworthiness, that they don’t have to file the export documentation. That is simply incorrect; export airworthiness and export compliance are mutually exclusive.”

The US federal government has power tools in its toolbox and one is the False Statement law (18 U.S.C. § 1001) making a false statement (verbal or written) to a federal official in their official capacity is considered a crime and subject to five years in prison and a $25,000 fine.

“There are probably 30 aircraft for sale that are in Aircraft Guarantee Trust and the first thing you realise is you can’t sell them without FAA and US Attorney’s Office approval,” said Hernandez. The FAA has already frozen all potential deals, which makes virtually “anybody with an Aircraft Guarantee ownership structure is very problematic.”

Federal government seize 12 aircraft

The federal government has already seized 12 aircraft in relation to the recent indictment. Hernandez said any aircraft in a trust or guarantee found in the US without proper exportation documentation may be seized in accordance with the US law (15 CFR subpart H).

Escrow agents are not classified as financial institutions, so they don’t have the same levels of knowledge of your customer requirements/regulation as banks.

“You’ve got all this money sitting in escrow where it’s supposed to remain,” continued Hernandez. According to the indictment, escrow agent, Wright Brothers was allegedly using the money for other purposes. “When I give my money to an escrow agent, I expect it to be there when I need it, so if I want to pull it back out it’s there.”

Vedder Price has set up a task force to help clients with the various issues arising from this indictment. The purpose is to identify clients’ risks, explain what their options are and to implement those options in communication with the US Attorney, the Office of Export Enforcement and the Department of Commerce.

“We have regained money for clients in the millions and are still doing it. You have to do it sooner rather than later with the government seeking $350m in restitution. In other words, they are going to take everything.”

One example is CCUR Holdings, Inc. which, since August 2018, has financed 12 transactions, each of which has used Wright Brothers as the escrow agent. Prior to 2021, each deposit had been returned without incident.

On January 12th CCUR Holdings was due the return of $8.5m in deposits. Upon inquiry to Wright Brothers and following repeated unsuccessful attempts to contact Mercer-Erwin, the firm learned that she had been arrested by law enforcement and that all assets of Wright Brothers had been frozen.

In addition to the funds mentioned, CCUR was also due the return of a further $5.5m in deposits on January 25th.

Hernandez warned many more businesses could be affected by subsequent investigations.“This is not a one investigation. This does not stop with Wright Brothers and Aircraft Guaranty Corp. Put it this way, let’s call this the coronavirus of the aviation industry. This will get much worse before it gets better.”

One industry insider told Corporate Jet Investor: “The concern will be that this gives rise to an irrational knee-jerk reaction in some way limiting the use of non-citizen trusts in the future. Overall, this re-emphasises the need for everyone in the industry to perform thorough due diligence for every client and every transaction. My experience with the trust providers and escrow agents that I work with is that they systematically do that.”

Meanwhile, the US Attorney’s Office, Eastern District of Texas has highlighted that all the defendants remain innocent until proven guilty. Corporate Jet Investor approached the Office of Inspector General, US Department of Transport but it was unable to comment. No one from Wright Brothers was available to respond to Corporate Jet Investor’s questions about the allegations. Read more about the indictment here.

The full implications of the case for business aviation will be explored in a special Town Hall online meeting on Friday March 5th. Please register to attend the hour-long event here.

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