Caveat Lessor: United States Fines Aircraft Lessor for Actions of Sublessee 

December 2, 2019

It will hardly come as a surprise to readers that air transportation and the trade in aircraft and parts is inherently international. Thus, participants in these industries have to keep an unblinking eye on the increasingly ubiquitous international regimes of trade and economic sanctions that apply to a wide variety of economic activities.

An aircraft leasing company recently found, to its chagrin, that one can never be too careful in navigating the tangled web of sanctions, particularly those enforced by the long arm of the United States.

The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), which maintains the nation’s economic sanctions regime, announced on November 7 sanctions against Apollo Aviation Group LLC (a U.S. company, now d/b/a Carlyle Aviation Partners Ltd.) for violation of the then-effective Sudan Sanctions Regulations. While the United States has since rescinded its Sudanese sanctions (formerly 31 C.F.R. Part 538), this does not affect enforcement against violations that took place while the sanctions were in effect. More importantly, this case demonstrates the lengths to which lessors must go in order to insulate themselves from (possibly substantial) liability under the various sanctions regimes.

Apollo Aviation, beginning in 2013, leased three jet engines to an entity incorporated in the United Arab Emirates (company 1), that then subleased the engines to a Ukrainian airline (company 2), that then installed the engines on aircraft wet leased (i.e. leased with crew) to Sudan Airways, that operated them in and out of Sudan. At that time, Sudan Airways was identified on OFAC’s List of Specially Designated Nationals and Blocked Persons, (SDN List) as it was controlled by the Government of Sudan. Accordingly, U.S. entities such as Apollo were prohibited from directly or indirectly engaging in transactions with Sudan Airways.

The leases between Apollo and company 1 contained the usual provisions that prohibited the lessee from maintaining, operating, flying, or transferring the engines to any countries subject to U.S. or United Nations sanctions. (This is as far as most lessors feel they need to go to protect themselves.) However, it was only after the engines were returned from lease that Apollo realized that they had been operated by Sudan Airways.

Apollo self-disclosed the violation to OFAC, which included that as a mitigating factor in reducing the penalty from a statutory maximum of $3 million to $210,600.

OFAC took some care to point out the lessons to be learned: Apollo’s failure was in not exercising diligence throughout the term of the lease to ensure that the engines were utilized in compliance with OFAC regulations. It should have — OFAC implied — obtained U.S. law export compliance certificates from the lessees and sublessees, and periodically monitored its lessee’s and sublessee’s adherence to the lease provisions requiring compliance with U.S. sanctions laws.

As noted, the United States no longer maintains sanctions against Sudan, but sanctions programs are still in place with respect to Cuba, Iran, North Korea, Russia, Syria, Ukraine, Venezuela, and numerous other countries and persons on the SDN List. 

In addition to the OFAC restrictions are the Export Administration Regulations (EAR) maintained by the Department of Commerce’s Bureau of Industry and Security (BIS). Under the EAR, export licenses may be required to re-export foreign-made goods having some amount of U.S. content. In some cases the threshold for U.S. content is as low as 10 percent. This means that in the aircraft realm, not only are Boeing aircraft subject to U.S. export controls, but by virtue of various U.S.-origin parts and components, export of most Airbus, Embraer, and Bombardier aircraft may also be restricted under the BIS rules. Lessors —including those based outside the United States — need to be aware that even if they are outside OFAC jurisdiction, they need to pay very close attention to the rules on re-export of U.S. goods.

The take-away from OFAC’s Apollo decision is clear: aircraft lessors cannot rely on a boilerplate lease clause to protect them; they must exercise pro-active vigilance over the products they are leasing out, know their customers, and in some cases know their “customers’ customers.”


Mark W. Atwood


(202) 463-2513

Related Practices

Should you have any questions regarding the issues discussed in this Alert, please do not hesitate to contact a member of Cozen O’Connor’s Transportation & Trade Department