Are aircraft “hiding” on U.S. registry?
The Bank of Utah was in the media bulls-eye last fall. Like several other U.S. banks and companies that specialize in this business, it serves as a trustee that holds legal title to jets listed on the FAA registry. Investigative journalists at the New York Times and elsewhere, looking to uncover newsworthy tax-avoidance schemes and security threats, seized on “a trove of records leaked from an offshore law firm” to blow the whistle on Russian “oligarchs” who were secretly registering their “private jets” in Oklahoma City, using the Bank of Utah as a “stand in.”
The Times story followed hard on the heels of a Boston Globe “Spotlight” piece that revealed, among other things, that a company called Aircraft Guaranty, in Onalaska, Texas, had registered over 1,000 aircraft through a “loophole in FAA regulations.” After a nod to “a boutique bank in Utah,” the Globe correspondents expressed their belief that “thousands of foreign-owned planes, marked with U.S. N-numbers, scattered around the globe” represented “an important issue and involved national security.”
Some members of Congress evidently agree. A bill introduced in the House last July by Representative Stephen Lynch (D-Massachusetts) would require an entity that registers an aircraft with the FAA to disclose (and provide documentation for) the entity’s “beneficial owners.” The bill defines such owners as people who, directly or indirectly, exercise control over the entity or have “an interest in” or receive “substantial economic benefits” from its assets. That would include, for example, the shareholders of a corporation.
Do the newspaper articles and proposed legislation reflect genuine concerns or are they attempts to address a problem that doesn’t exist?
First, there is nothing illegal about a non-U.S. citizen using a U.S. trust to register an aircraft. If an aircraft owner can’t satisfy the citizenship requirements in FAA regulations, the FAA offers two main options (let’s not call them “loopholes”): the “based and primarily used” test for corporations, and the owner trust. The former allows the non-U.S. citizen to register the aircraft in the U.S. as long as it is based here and logs at least 60 percent of its flight hours in the U.S. every six months. To date, this option does not seem to have drawn any media attention.
The same cannot be said for owner trusts. Trusts date back to the Middle Ages as a way to separate legal and beneficial ownership. The trustee—which the FAA accordingly records as the aircraft owner—is the official or “legal” owner of the property. But the trustee holds the aircraft in trust for the beneficiaries, who do not appear on the registry as owners (though the trust instrument and related documents are filed with the FAA as a public record and are readily available on databases such as AMSTAT). Trust instruments for U.S.-registered aircraft must be reviewed and approved in advance by FAA registry counsel.
Lack of information about trust beneficiaries has not escaped the FAA’s notice. In 2010, it began complaining about trusts with non-citizen beneficiaries, many of which had trust instruments governed by foreign law, and considered introducing a moratorium on the approval of such trusts and even prohibiting them altogether. [See “Lack of Trust,” December 2010/January 2011,—Ed.]
These proposals were met with a thunderous outcry from aviation attorneys and their clients, and in the end the FAA simply introduced reasonable and more stringent requirements for trust instruments. In particular, the FAA wanted to make sure that trustees such as the Bank of Utah, Delaware Trust, and Wells Fargo were responsible for retaining or obtaining key information about the aircraft and its operations. In some ways, it’s actually easier for the trust to obtain this information than the government.
These reforms are apparently insufficient for some critics, who worry about clandestine evil doings involving aircraft held in trust. Should we worry too?
Trusts aren’t the only way to disguise beneficial ownership of jets. Aircraft are registered all the time in the name of special-purpose entities such as limited-liability companies that aren’t exactly transparent regarding their real owners. Lynch’s well-meaning bill, of course, would solve that problem by requiring disclosure of the ultimate beneficial owners of all entities, not just trusts. But the congressman’s proposal is impractical. How will a public company with thousands of stockholders—many of which are mutual funds and similar investment vehicles that themselves have thousands of shareholders—disclose its beneficial owners? Even if they could somehow provide a list of all of them, they’d then have to deal with Lynch’s bill’s requirement that the list be updated within 60 days of any change in the information.
But why is there a national security issue about the owners, anyway? Non-U.S.–registered aircraft fly around the U.S. all the time; there’s a harmless-looking jet registered in Bermuda outside my office window right now. If the concern is that someone will fly a jet into a Manhattan skyscraper or drop bombs on the Super Bowl, what difference does it make if the aircraft is on U.S. or Bermuda registry? Knowing the beneficiaries of non-citizen U.S. trusts will not protect us from heinous acts involving business jets. Nor will forcing jets “scattered around the globe” to forsake their current U.S. registration in favor of, say, Isle of Man greatly enhance our national security.
Of course, one purpose of allowing U.S. registration of aircraft in the name of a trust is precisely to enable such registration by non-U.S. citizens. FAA citizenship tests, for example, require corporations to have a “president” who is a U.S. citizen, a requirement that some major U.S. aircraft-owning corporations don’t meet. In such cases, a trust offers an easy solution.
Further, many jet owners who are U.S. citizens put their aircraft in trusts because they simply want to remain as anonymous as possible. Not every U.S. jet owner is as eager to advertise to whom his aircraft belongs as, say, Donald Trump.
And the idea that using a trust is a bulletproof device to hide your aircraft ownership from nosy people and investigative journalists is unrealistic, anyway. Journalists and aircraft brokers can usually get to the bottom of the issue if they want to.
Doubtless we can find ways to be better informed about who really owns U.S. aircraft, but let’s not think that doing so will necessarily make America safer.