Sanctions: “What, me worry?”
An op-ed by Eric Lewin, Founder of The Law Offices of Eric Lewin
Does the Cape Town Convention (CTC) shield Aviareto Limited (Aviareto) from liability for its failure to comply with economic sanctions and export controls? This question is important: Aviareto has a monopoly over a territory comprised of 83 countries and 1 Regional Economic Integration Organisation with a combined population of roughly 4,000,000,000 people.
In 2015, an Irish barrister argued in the Cape Town Convention Journal that: (1) Aviareto is exempt from liability for its failure to comply with the anti-Russia sanctions and export controls of the EU and its Member States then in effect; and (2) offered a conclusion that might support a general premise that the CTC shields Aviareto – and any other Registrar – from liability for breaching economic sanctions and export controls.
Aviareto, however, would not be immune from liability for violating US economic sanctions and export controls.
Prologue: A pre-owned Ford F-250
(Credit: https://twitter.com/caleb_weiss7/status/544561872390086656/photo/1)
In December 2014, a Twitter user published this photo of jihadis in Syria who had: obtained a Ford F-250 originally owned by a Texas-based plumber; and mounted heavy artillery on its tailgate. The story is described here: https://www.usnews.com/news/articles/2017-01-09/plumber-whose-decaled-truck-went-to-syria-settles-lawsuit.
Irrespective of whether any economic sanctions or export controls were violated, the plumber’s truck vividly demonstrates how resourcefulness and ingenuity can contribute to global insecurity.
What could sanctions targets do with pre-owned mobile equipment that qualifies for registrations under the CTC, such as aircraft, aircraft engines, helicopters, or mining, agricultural, and construction equipment?
1. The purpose of the CTC conflicts with that of economic sanctions and export controls
The purpose of the CTC includes facilitating international commerce and increasing access to finance. Economic sanctions and export controls, however named (the EU uses the term, “restrictive measures”), are designed to frustrate the ability of their targets to participate in international commerce and to access finance.
(a) The CTC
Papers authored by Professor Vadim Linetsky (relating to the Aircraft Protocol) and Warwick Economics and Associates (relating to the Mining, Agricultural and Construction Equipment Protocol, which is not yet in force, but has been signed by five countries) explicitly project that the CTC should make financing cheaper and more abundant so that it should be easier for end users globally to obtain qualifying mobile equipment. Consequently, there should be increased demand for qualifying equipment (particularly in developing countries), manufacturers would increase production, developing countries would develop, employment everywhere would increase, and the world would be better off. These papers focus on new equipment. The CTC applies to pre-owned equipment, too.
(b) Economic Sanctions and Export Controls
Economic sanctions and export controls are tools a sovereign uses to pursue its national security goals and other foreign policy interests. Together, economic sanctions and export controls restrict access to funds, assets, the financial system, commodities, technology, and software.
2. Aviareto: a global monopolist that provides a public service
Aviareto has received the global monopoly to perform the public service of acting as Registrar under the CTC for aircraft transactions. In qualifying transactions, financiers must, as a matter of law, use Aviareto’s technology to register international interests in order to become senior secured creditors. Owners may – but are not required to – register contracts of sale to evidence their ownership interests in qualifying equipment.
Aviareto’s technology allows buyers, sellers, and financiers globally of qualifying mobile equipment to pre-position, order, make, and consent to registrations. This process allows Aviareto’s users to tell the world through the CTC notice-based regime who has interests in qualifying mobile equipment and in what order.
3. Aviareto escapes liability for its failure to comply with the restrictive measures of the European Union and its Member States
Mr. David Fennelly, an Irish Barrister, argues in Cape Town Convention and international sanctions: the case of European Union sanctions against Russia, (Cape Town Convention Journal, 4:1, 83-102, DOI: 10.1080/2049761X.2015.1104841) (https://doi.org/10.1080/2049761X.2015.1104841) (2015) that Aviareto escapes liability for its failure to comply with the restrictive measures against Russia then in effect primarily because the EU had acceded to the CTC. Fennelly concludes that preemption under EU law “provides strong protection for the effective operation of the [CTC] regime within an international legal system where sanctions appear to have an ever-expanding reach.” (emphasis added). In a footnote on the first page of the article, Fennelly acknowledges Mr. Rob Cowan, Sir Roy Goode, and Mr. Jeffrey Wool (among others) “for comments on an earlier draft of the paper” while absolving them of responsibility “for any errors or omissions.” That footnote is silent as to their professional roles, but other sources confirm that they were and (except as noted below) still are respectively: Managing Director of Aviareto; author of the Official Commentary of the CTC; and both Secretary General of the Aviation Working Group and General Editor of the Cape Town Convention Journal (the most recent volume of the Cape Town Convention Journal is the 7th edition from 2018 and which was published in 2020, so it is unclear whether this journal still exists).
Fennelly begins with a discussion of the CTC and Aviareto: he states that Aviareto is both the Registry and the Registrar under the CTC. Fennelly characterises Aviareto’s functions as “essentially administrative,” and yet he acknowledges that Aviareto’s functions are “of fundamental importance to the effective operation of the entire [CTC] system.” He further states that the CTC is “a notice-based electronic registration system” (quoting article 17(2)(i) of the CTC) whose purpose is to ensure a universal system to recognise and protect interests in mobile assets.
Fennelly’s thesis is built on an analysis of the EU’s rules concerning preemption and treaty interpretation. Essentially, he states that: (1) article 26 of the CTC prohibits Aviareto from denying access to the International Registry on any basis other than those bases defined in the CTC, and restrictive measures constitute none of those bases; and (2) due to EU law’s preference to uphold international treaties, (a) the EU’s accession to the CTC results in the CTC’s preempting the legislation of the EU and its Member States, and (b) where there is a conflict between (i) EU and/or the domestic legislation of its Member States and (ii) article 26 of the CTC, the CTC must be interpreted in the light most favourable to the CTC.
Turning to the anti-Russia restrictive measures themselves, Fennelly determines that: (1) Aviareto may collect fees from the targets of restrictive measures on the basis of preemption and the rules on interpretation; (2) Aviareto can keep those fees because it has no obligation under the CTC to issue refunds; (3) Aviareto remains able to provide search certificates that evidence interests in aircraft held by the targets of restrictive measures and the ancillary rights thereto, such as the right to proceeds generated by those aircraft, on the basis of preemption and the rules on interpretation; and (4) Aviareto’s software is not dual-use (i.e., it cannot be used for military applications).
Fennelly cites Goode for the proposition that, for sanctions purposes, Aviareto is a kaleidoscopic enigma: depending on how one looks at Aviereto, it may – or may not be – subject to sanctions imposed by various sovereigns. Fennelly specifically excludes from his article consideration of the United States’ sanctions but acknowledges potential sanctions issues for Aviareto because Aviareto: deals in USD; facilitates transactions that have a nexus to the United States; and provides U.S. technology to certain end users.
Fennelly cites Goode’s Official Commentary for the proposition that, notwithstanding the CTC, contracting states may impose sanctions and anti-money laundering legislation (the language is quoted in section 4.2(b)). That same citation, however, undermines State power by referring to Article 27 of the Vienna Convention on the Law of Treaties. Article 27 prevents contracting states from relying on their internal laws to fail to comply with their treaty obligations (such as those in the CTC). The EU itself has not signed the Vienna Convention on the Law of Treaties, not all EU Member States are a party to it, and the United States is not a party to this convention. The United Kingdom is a party to the Vienna Convention on the Law of Treaties, and, interestingly, so is Russia, which acceded to it as the Soviet Union.
4. Aviareto could be held liable for violating U.S. economic sanctions and export controls
This section: explains how Aviareto’s software might violate U.S. economic sanctions and export controls; and contends that (a) Aviareto must comply with U.S. economic sanctions and export controls, (b) Aviareto cannot establish sovereign immunity to escape liability for its violations of U.S. economic sanctions and export controls, and (c) a judgment could be enforced against Aviareto. This section assumes that OFAC has not granted to Aviareto a special license and that there is no general license on which Aviareto can rely to perform its duties under the CTC.
4.1 Aviareto’s software could violate economic sanctions and export controls
Recent OFAC action against Aviareto’s ultimate parent company, SITA SCRL (also apparently referred to as SITA S.C. See, note 17 in Aviareto’s 14th Annual Report published in 2019, which appears to be its most recently available report.), may illustrate an aspect of Aviareto’s US sanctions risk. In February 2020, OFAC announced that SITA SCRL was fined upwards of $8 million for apparently violating U.S. sanctions. SITA SCRL had provided U.S. source telecommunications software from an unnamed US software manufacturer and other software through infrastructure based in the US to airlines that the US had designated at that time as global terrorists. Aggravating factors included that SITA SCRL: had actual knowledge that it was providing the software directly or indirectly to sanctioned entities; and was a commercially sophisticated entity that operates in almost every country globally. More information is available here: https://home.treasury.gov/system/files/126/20200226_sita.pdf.
Aviareto’s software, like that of SITA SCRL, facilitates communication, and it apparently relies on US-source technology. For example, marketing material produced in apparent cooperation with Aviareto published in 2017 and again in 2018 by Symantec (an American company) states that Aviareto implemented Symantec’s Managed PKI Service to support Aviareto’s “global electronic commerce” business as the Registrar of the International Registry. The marketing material further states that Symantec’s service allows Aviareto to authenticate users and prohibit them from repudiating communications made using Aviareto’s software to record the “legal priority of interests on [qualifying assets].” (internal quotes omitted). (For more information, see, https://www.websecurity.digicert.com/use-cases/aviareto; https://www.websecurity.digicert.com/content/dam/websitesecurity/digitalassets/desktop/pdfs/CustomerSuccess/aviareto-en.pdf; and https://www.websecurity.digicert.com/content/dam/websitesecurity/digitalassets/desktop/pdfs/CustomerSuccess/aviareto-mpki-casestudy-en-us-2018.pdf.) (All last viewed on March 31, 2022.)
Like SITA SCRL, Aviareto can be viewed as commercially sophisticated and as having knowledge (actual or constructive) of the impact of its operations in part due to: (1) the international scope of its operations; (2) its customer-approval process; and (3) the apparent influence and/or control of its stakeholders.
It is also possible that the use of Aviareto’s software could form a part of a larger fact pattern that gives rise to other apparent violations of economic sanctions and export controls.
4.2 Aviareto is subject to US economic sanctions and export controls, and sovereign immunity is unavailable to it
(a) The Constitution is superior to all treaties
In the United States, sovereign power resides with the people. The Federal Government exists because the people created it and granted it powers when the people adopted the Constitution. Amendment X to the Constitution provides that the United States has only those powers which are specifically enumerated in the Constitution, and that unenumerated powers are reserved to the States, or to the people. The Constitution is the supreme law in the United States.
Article I, Section 8, clause 3, the Commerce Clause, of the Constitution authorises Congress to impose economic sanctions and export controls. Article VI, the Supremacy Clause, of the Constitution places treaties on equal footing with other laws enacted by Congress. Treaties do not, however, diminish Congress’s powers under the Constitution. Congress remains free to enact legislation that violates US treaty obligations, including legislation that unilaterally repeals treaties. The President, for that matter, is also free to unilaterally terminate treaties pursuant to the political question doctrine.
(b) The CTC is a non-self-executing treaty
Resolving conflicts between a treaty and existing Federal and State law is a matter of treaty interpretation. Interpretation is ordinarily the province of the courts. One typically starts with the text of the treaty; then one moves to legislative intent.
The text of the CTC relates solely to attaching and perfecting a class of property interests recognised by the CTC. It is silent as to economic sanctions and export controls (as well as a variety of other matters). The excerpt of Goode’s Official Commentary cited by Fenelley confirms this view and further states: “The [CTC] does not address, and is generally not intended to affect rules of criminal law, tort law, or regulatory public law in national legal systems. Contracting States remain free to apply and enforce their rules of criminal law and tort law, as well as regulatory measures designed to impose economic sanctions or to prevent money laundering, drug dealing and the like, and regulations in the field of financial services law and competition law. This has always been taken for granted in private commercial law conventions, which make no reference to the above matters.” (emphasis added)
A question of interpretation that arises is whether all, or a part of, a treaty is self-executing or non-self-executing. Self-executing treaties: (1) are equal to Federal law, superior to State law, and inferior to the Constitution; and (2) do not require an act of Congress to implement them. Non-self-executing treaties: (1) require an act of Congress to be implemented; and (2) do not supplant existing State or Federal law in the absence of implementing legislation.
The CTC is a non-self-executing treaty. Congress implemented the CTC when it enacted the Cape Town Treaty Implementation Act of 2004 (the Act). Congressional intent, which is consistent with presidential intent, appears both in the Act and its legislative history. Congress wanted to stimulate sales of U.S.-manufactured new aircraft and aircraft engines. To achieve this, Congress wanted the CTC to be a means for other countries to improve their laws for the sale, finance, and lease of aircraft “in a manner consistent with United States law and practice.”
It is immaterial that Congress did not state explicitly that the treaty is non-self-executing. In fact, the Supreme Court of the United States does not require “talismanic” language to determine whether a treaty is self-executing. Instead, the Supreme Court has only to establish whether a treaty’s terms, as determined by the president and Congress, provide for the treaty to have domestic effect.
Congress found that only technical changes to US Federal aviation law were required to implement the CTC, and Congress made only those technical changes in the Act. The CTC, like the Act, is silent both as to economic sanctions and export controls and as to whether Aviareto benefits from immunity for violations of those laws.
Buttressing this view is the recent practice of the United States. OFAC has published its view that the aviation industry is high risk due to the use of intermediaries to circumvent US sanctions. Subsequently, OFAC imposed liability for apparent violations of economic sanctions and export controls caused by aircraft engine subleasing arrangements, and OFAC took the action against SITA SCRL described in section 4.1.
The CTC, does not, therefore, override Congress’s economic sanctions and export controls (whether current or pre-existing), or provide Aviareto with immunity for its violations of economic sanctions and export controls.
(c) Aviareto does not benefit from sovereign immunity under US law
Article III of the Constitution provides Federal courts with jurisdiction to hear claims involving foreign states. The Foreign Sovereign Immunities Act (FSIA) limits that jurisdiction by granting immunity to sovereigns and their instrumentalities unless an express exception applies. 28 U.S.C. § 1605 lists general exceptions to immunity that apply “in any case.”
Federal courts have consistently held that immunity under FSIA applies to civil proceedings brought under 28 U.S.C. § 1330(a). Some federal district courts (as affirmed on appeal) have also held that subject matter jurisdiction under 28 U.S.C. § 1330(a) is supplemented by other bases of subject matter jurisdiction, such as jurisdiction for criminal offenses under 18 U.S.C. § 3231. On appeal to resolve issues of statutory interpretation, some circuit courts have declined to resolve whether immunity under FSIA applied to criminal proceedings. Instead, those courts have assumed that immunity under FSIA applies to criminal proceedings and then they performed the analysis required by FSIA to determine whether an exception to immunity set out in 28 U.S.C. § 1605 applies. Of the exceptions, the commercial activity exception appears to be the most relevant.
(i) Criminal jurisdiction over Aviareto exists under 18 U.S.C. § 3231
18 U.S.C. § 3231 gives the Federal district courts original jurisdiction over “all offences against the laws of the United States.” 18 U.S.C. § 3231 contains no exceptions to this grant of criminal jurisdiction. 18 U.S.C. § 3231, therefore, allows the U.S. government to pursue Aviareto for criminal charges, including violations of U.S. economic sanctions and export controls, and seek remedies against Aviareto.
(ii) Even if immunity under FSIA applied to criminal proceedings, Aviareto would not be immune from prosecution because Aviareto is not a sovereign instrumentality, and, even if Aviareto were a sovereign instrumentality, its activities are commercial.
Assume (for the sake of argument) that FSIA grants sovereign immunity from criminal proceedings, including those commenced under 18 U.S.C. 3231. Aviareto would, however, be unable to establish sovereign immunity because Aviareto is not a sovereign instrumentality and, even if Aviareto were a sovereign instrumentality, its activities are commercial.
For a defendant to qualify as a sovereign instrumentality, the sovereign must be the majority shareholder of the defendant. Aviareto does not qualify as a sovereign instrumentality because: (1) the Republic of Ireland is its minority shareholder; and (2) Aviareto’s ultimate parent, SITA S.C., is owned by airlines. Regulation of Aviareto by ICAO is irrelevant.
Assume (again for the sake of argument) that Aviareto could establish that it is a sovereign instrumentality. Aviareto would be precluded from establishing immunity because its conduct would satisfy the express exception for commercial activity. To evaluate whether an activity is commercial, one looks to the “nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.” The question is whether the actions constitute “the type of actions by which a private party engages in trade and traffic or commerce.”
The purpose of Aviareto’s activities is to perfect interests in mobile equipment in accordance with the CTC. This is a public service performed pursuant to a statutory mandate. Aviareto satisfies its purpose by operating a “global e-commerce system.” Aviareto: requires potential customers to apply for access to its platform and services; grants access to its platform and services; charges its customers fees; has developed proprietary technology to facilitate the provision of its services; has registered trademarks; records profits and losses (notwithstanding its assertion that it operates on a not for profit, cost recovery basis); can increase its fees; and has touted its success.
Aviareto’s support structure described in its 14th Annual Report also bears the hallmarks of sophisticated commercial activity engaged in by multinational conglomerates. Pursuant to related-party transactions with three SITA entities, Aviareto receives: “HR, IT, finance, Treasury [sic] and support services;” “software development services;” and “management services.” The treasury services include a cash pooling agreement between SITA S.C. and Aviareto pursuant to which Aviareto manages its foreign exchange risk. It is structured as an unsecured on-demand loan advanced by Aviareto to SITA S.C. who pays interest to Aviareto.
(iii) Aviareto’s property is not immune from enforcement under FSIA
If a US Federal district court were to hold Aviareto liable for violating US economic sanctions and export controls, Aviareto could also try to use FSIA to establish immunity over its property from enforcement. However, FSIA also includes exceptions to enforcement immunity that track the exceptions to jurisdiction immunity. The commercial activity exception may provide the US with recourse against property used by Aviareto in furtherance of its commercial activities in the US. Aviareto would also be hard-pressed to argue that any remedy issued by a US court is unenforceable on the basis that compliance would violate Irish, or any other, law.
(iv) Even though Aviareto must comply with U.S. law, what remedies are appropriate?
Therefore, Aviareto must comply with all US laws, Aviareto has no immunity to liability for violating them, and a judgment could be enforced against Aviareto and its assets. An issue is: what remedies could be sought against Aviareto that U.S. market participants would not subsidize?
Epilogue:
Where to now?
On March 18, 2022, the Aviation Working Group issued a statement which accuses Russia of breaching the CTC and records the facts underlying that breach. The statement omits an explicit solution, so the implicit message is that Russia should return to complying with the CTC (see, http://awg.aero/wp-content/uploads/2022/03/AWG-Statement-Russian-State-Action-Constituting-CTC-Breach-March-18-2022.pdf). On March 31, 2022, the Aviation Working Group published a statement that: refers to Russia’s actions and their impact on creditors; and contains a general statement that contracting states to the CTC have an obligation under “international law” to comply with the CTC. (http://awg.aero/wp-content/uploads/2022/03/AWG-Statement-Contracting-State-Obligations-to-Support-CTC-Remedies-March-31-2022.pdf) As a practical matter, the Aviation Working Group’s statements confirm that the largest global institutions are powerless in the face of a determined sovereign.
This should come as no surprise. For example, in some contracting states, the CTC has not prevented courts from frustrating lessors’ attempts to repossess aircraft (Brazil), or local civil aviation authorities from failing to deregister aircraft (India). Likewise, even the U.S. Bankruptcy Court for the Southern District of New York issued a provisional order under a Chapter 15 process that the aggrieved lessors and the Aviation Working Group argued violated the CTC. These failures might have been characterized as mature teething issues justifying the inception of the Cape Town Convention Compliance Index. However, Russia’s “Grand Theft Aero” – and the supposition by market participants that China could follow suit – strongly suggest that the CTC is incapable of providing the benefits advertised. (see, https://www.ft.com/content/61a2daab-2251-4a8b-8960-f69fde1f5642). Substantively, therefore, Aviareto appears to provide little or no value to market participants in exchange for either the fees it charges or the monopoly granted to it.
It would also be a horrific outcome if Aviareto (or any other Registrar) were able to make money from – while escaping liability for – contributing to global insecurity. The existence of Fennelly’s article, the involvement of Cowan, Wool, and Goode with it, as well as Goode’s view that the nature of Aviareto is inconstant, cast doubt on what Aviareto’s approach to compliance with economic sanctions and export controls really is. Fennelly’s article is also troubling because Aviareto’s purported ability to collect and retain fees paid by the targets of restrictive measures sounds a lot like money laundering. Could one argue that Aviareto is immune from liability for that, too?
