A recent 46-page indictment issued by the U.S. Department of Justice begins:

“Aircraft Guaranty Corp. (AGC) registered thousands of aircraft in Onalaska Texas, an East Texas town without an airport. The true owners of many of these aircraft are foreign nationals.”

Does this sound sinister? It is not. There are more than 5,000 aircraft registered in U.S. “owner trusts.” Why? There are a variety of reasons. U.S. manufacturers can sell aircraft to foreign customers by using owner trusts. This allows the U.S. manufacturer to sell the aircraft with a U.S. airworthiness certificate rather than obtaining authority in multiple jurisdictions. Owner trusts give U.S. owners with security concerns an additional layer of privacy. And, in a global economy, more and more U.S. companies fail one or more elements of the definition of a corporate “citizen of the United States”:

(1) A corporation or association organized under the laws of the United States or a state, the District of Columbia or a territory or possession of the United States,

(2) of which the president

(3) and at least two-thirds of the board of directors and other managing officers are citizens of the United States,

(4) which is under the actual control of citizens of the United States, and

(5) in which at least 75% of the voting interest is owned or controlled by persons that are citizens of the United States.

The criminal action brought by the DOJ began with an investigation by the Department of Commerce, Bureau of Industry and Security, Office of Export Enforcement and Homeland Security Investigation that was initiated after the agencies noticed irregularities in aircraft filings and learned that several aircraft registered by the defendants were seized or destroyed while smuggling drugs internationally.

The DOJ indictment lists more than 20 aircraft that were allegedly transferred to foreign nationals without making required export filings. Many of these aircraft allegedly transported drugs, or were “configured for narcotics transportation” (this is not explained).

The indictment does not indicate that the FAA participated in the investigation. It is unclear whether the FAA was consulted. (The assistant U.S. attorney who signed the indictment declined to be interviewed).

In 2011, the FAA reviewed aircraft owner trusts and conducted extensive discussions with aviation industry experts. The FAA began its review in part because of problems it had experienced in obtaining important operational and maintenance information concerning such aircraft from the registered owners, i.e., the owner trustees. The problems in obtaining such information in turn affected the FAA’s ability to conduct fully effective oversight of such aircraft when operated outside the U.S., and to provide foreign civil aviation authorities with information on those operations in support of the safety oversight activities of those authorities. In simple terms, U.S.-registered aircraft were involved in accidents overseas and the FAA found that it couldn’t get adequate answers about the operation of those aircraft. The FAA also undertook the review of non-citizen trusts because of concerns that some of those arrangements may not have complied with FAA requirements for non-citizen trusts.

As a result of the discussions with industry, the FAA clarified its policy on what trustees should be prepared to provide. In particular, the FAA expects that within two business days a trustee will be able to provide to the FAA the following information about the aircraft and its operation:

• The identity of the person normally operating, or managing the operations of, the aircraft.
• Where that person currently resides or has its principal place of business.
• The location of maintenance and other aircraft records.
• Where the aircraft is normally based and operated.

The FAA further expects that within five business days the trustee, as the registered owner of the aircraft, will be able to respond to FAA requests for more-detailed information about the aircraft and its operations, including:

• Information about the operator, crew and aircraft operations on specific dates.
• Maintenance and other aircraft records.
• The current airworthiness status of the aircraft.

It has been a busy decade since the FAA and industry discussed these issues. Will the current criminal investigation cause the FAA to review these regulations again? Hopefully not, because the owner trust regulations serve important industry needs and help U.S. aircraft manufacturers expand their customer base. But the old adage that “bad facts make bad law” still applies. 

In addition to allegations about a “trust scheme,” the DOJ indictment goes into great detail about a devious “Ponzi scheme” where loans were taken out for fake aircraft transactions. Subsequent loans were used to make payments on earlier loans to perpetuate the scheme. The Ponzi Scheme allegations make it clear that the DOJ found criminal activity that had nothing to do with owner trusts. 

This is a high-stakes case for the DOJ, because they want “criminal forfeiture” of $350 million and nine aircraft. It’s also a high-stakes case for the industry, because many of the headlines have focused on the trust scheme rather than the Ponzi scheme. This could lead to political pressure for the FAA to once again examine aircraft owner trusts.