ABC’s for Non-U.S. Citizens Aircraft Owners: The FAA’s new policy on aircraft registration by Non-US Citizens & how this could affect you

The FAA has introduced a new policy, which is effective as of September 16^th, 2013 (“Notice of Policy Clarification”).^[1] The official title of this new policy is in my opinion indicative of the content of the policy. It is complex and probably not easily understood by the parties affected. These parties are non U.S. Citizens (“NC’s) that own/operate an aircraft registered in the U.S.A (“N-registered”) but generally use or operate such aircraft outside of the U.S.A. for private purposes (“general aviation purposes”). It is estimated by the DOT that this group consists of well over 5,600 individuals.^[2]I will do my best to simplify the discussion in order to make this complex  – and perhaps confusing – matter more palatable.

First things first

I have been following the NCT discussion for about a year, along with all that the FAA has been doing prior to adopting the Notice of Policy Clarification. However, it was not until after the Notice of Policy Clarification came into effect that I found a document that made it clear to me that this FAA initiative was – seemingly in big part – driven by the Department of Transport (“DOT”). The Inspector General of the DOT audited the FAA and concluded in very unambiguous terms that the FAA was (simply) lacking in information needed for aviation and safety and security measures.[3] Somehow the articles that I read and the presentations that I followed all lacked this fact that in my opinion does help put things in better perspective.

On to the NCT

As a NC – and high net worth individual – you may have chosen to acquire an aircraft in the U.S.A. and later learned that since you are not a NC you are unable to register your aircraft in the U.S.A. Federal regulations limit the (privilege) of registrations of aircrafts in the U.S.A. to only U.S. Citizens.

At the same time, however, you were told that through a loophole (or creative solution) you could nevertheless realize your objective. The Non-Citizens Trust (“NCT”) was developed in practice to make this possible. 

How it works (or used to work)

A NC would enter into a trust agreement (“Trustor”) with a licensed trustee solely for registration purposes with the FAA (“Owner Trustee”). The Owner Trustee filed the application for the registration of the aircraft with the FAA. The FAA would process the application and proceed to register the aircraft. At the same time an operating agreement was signed between the Owner Trustee and the Trustor/NC allowing the latter to use the aircraft freely, as if it were the owner. The Trustor/NC would then typically operate the aircraft outside of the U.S.A.

Is this legal?

For a long time this was deemed to be in compliance with the federal regulations. I did, however, come across a footnote in the Notice of Policy Clarification stating that the FAA (initially) was of the opinion that registration of such aircrafts was not possible, but later realized that these NCT structures were commonly used.^[4] It seems to me that in this case the FAA decided not to enforce its own policy when it realized it had become an industry practice. In the Notice of Policy Clarification the FAA seems to leave the answer on the legality of the NCT use suspended in mid-air.

The FAA’s focus

Now the FAA is particularly interested in NCT’S involving aircraft that are primarily or exclusively used in general aviation or serial works operations outside the U.S.A., the FAA feels that it has a lack of information on these operations in order to comply with certain international obligations. The FAA believes that the Notice of Policy Clarification allows them to – over time – fill the gap of information it now has.

The DOT’s position

The DOT is a bit more specific than the FAA in defining the problem. It states that the current lack of information impairs the FAA (as well as other government agencies) to take adequate safety and security measures in the U.S. aviation industry.

And now what will happen to the NCT’s?

Compliance with this new policy requires that (most of) the current arrangements between trustees and non-U.S. citizens for purposes of aircraft registration be amended. This will require pro-active actions from the Owner Trustees and prompt participation from the Trustor. Ignoring this matter will not lead to compliance, and non-compliance with federal regulations is – as you can imagine – not without consequences.  Below you will find a short list of how things will (have to) change in the current arrangement. Only the NC’s will be able to assess the impact of this and consider an alternative jurisdiction for registration.^[5]

The current trust agreement will have to be amended. These agreements will have to be submitted to the FAA for review along with all other amendments thereto or side-letters. The FAA will only allow registration in the U.S.A. if the trust agreement is in compliance with the new policy. The new policy amongst others requires: (i) for the foreign owner to have maximum of 25% of the trust; and (ii) for the foreign owner to be limited in its powers to dismiss the trustee.

The Trustor/NC will have to disclose specific information to the Owner Trustee and the FAA that was previously not required. This information includes: (i) name and contact details of the person (or entity) normally operating the aircraft or that maintains the operation of the aircraft; (ii) any operating agreement by virtue of which you are entitled to use the aircraft along with any and all other arrangements; and (iii) the normal place of operations of the aircraft.  Some of this information will be a matter of public record.

In the past the Owner Trustee frankly didn’t care to ask for and maintain any of this information because it had taken the position that as an Owner Trustee its only purpose in life was to facilitate the registration with the FAA and nothing else.  The FAA does not recognize the Owner Trustee’s claim that it is not obligated to have in its possession or to make available such information to the FAA. The owner of the aircraft i.e. the trustee has the legal obligation to provide this information.

What will or can the FAA do with this information?

The FAA has implemented this policy in order to comply with federal regulations and treaty obligations with regard to safety oversight functions, safety investigations and safety rule-making activities. In cases that the aircraft is operated outside of the U.S.A., the FAA can also use this information to provide those foreign civil aviation authorities (“Foreign DCA’s) with information about the aircraft in order to allow these Foreign DCA’s to carry out their domestic safety oversight functions

Should you be concerned?

Well…it all depends… The new policy will mean change in “business as usual”. The trustees will have adapted their trust agreements effective September 16^th, 2013. Since the new policy will require additional functions from the Owner Trustee, expect to pay (a bit) more for this facility.

Be prepared to provide certain information regarding the particulars of the location of the aircraft, its crew, its whereabouts, past and future flight plans, etc. Expect to answer some questions and to provide more paperwork than you had to in the past.

The thought of not being able to remove an owner trustee from its function or not being able to direct an owner trustee may make you, as the purchaser/owner of an expensive mobile asset, perhaps a bit uncomfortable but in exchange of a few billable legal hours your lawyers would be glad to show you the pathway to complying with the federal law.

Consider that the exchange of information between civil aviation authorities worldwide is common, often informal and not necessarily disclosed to the owner of an aircraft when such exchange will or has taken place. Also, it is not  (necessarily) subject to the same conditions that other (judicial) governmental agencies usually have to comply with when engaging in inter-governmental contacts. This cozy relationship between civil aviation authorities could trigger the FAA and certain Foreign DCA’s to perhaps pay a little closer attention to NCT’s and exchange some “basic” information about the ownership and the missions of these aircrafts.

Am I the only one?

The DOT report estimates that the FAA has inadequate records or control over 5,600 aircrafts, or 54% of aircraft, owned under NCT’s. This means that you are not the only one. It cannot be said that you are in good company because the FAA is likely not to have adequate records of this.

I shouldn’t worry, this will be gone soon….

While the FAA has worked along with stakeholders prior to implementing the Notice this is likely not the end of this exercise by the FAA. The DOT has made it very clear that the Notice in its current form will not resolve the current deficiencies: “….we do not agree that FAA’s clarification of its aircraft registration policy will ensure that FAA has the information it needs.”^[6] The DOT believes that the Notice does not ensure that FAA will have the information it needs for proper safety and security oversight.^[7] The DOT has requested that FAA reconsider its current position and provide information to the DOT to clarify how it will collect and maintain current information about the ownership and operations of all aircraft owned under NCT’s. Eventually this could lead to a de facto re-registration of all these aircraft or more recommendations from or actions to be taken by the DOT.

Should I consider a different (offshore) registration?

A bit ironic perhaps, but for many NCT’s i.e. the trustors, the FAA acts de facto as an off-shore aircraft registry so considering another offshore registration may be an exercise worth undertaking. Think about it; while certain NC’s perhaps would not mind the extra requirements, they may be uncomfortable with a few things:

• The uncertainty of when the DOT will be satisfied with the policy to be implemented to comply with the basis that the DOT has set up
• The extra attention that the FAA will pay towards these aircrafts
• The uncertainty of non-compliance with U.S. federal regulations
• The uncertainty of (cozy) information exchange between the FAA and their domestic civil aviation authority (and possibly other domestic authorities).

Does the Registry of Aruba face similar issues?

The Registry of Aruba does not face similar issues or limitations. As an established and well-respected operators’ registry it requires all relevant information from the owner/operator to ensure that it is able to perform a safety and security oversight at the required levels of the applicable treaties and ICAO requirements. All these records are maintained electronically and are accessible and the authenticity of all the certificate and licenses are available online on a 24×7-basis. As an OECD white-listed country Aruba furthermore requires for professionals involved in the registration process, such as: trust companies, civil law notaries and lawyers, to comply with the applicable KYC-legislation.

Recently Aruba enacted a regulation that enables the aviation authority to use in addition to its own safety inspectors also outsourced inspectors (“DI’s) to increase its safety oversight capabilities. All this puts Aruba in an ideal position to further grow the business aviation registration in the months and years to come.

As such many of my colleagues in the U.S. believe that Aruba will be an attractive option for those NC’s that are currently operating their aircraft under the N-registry, as the regulatory and fiscal infrastructure are transparent and recognized by the industry. This will allow the high net worth individuals to transfer the registration to the aircraft in an efficient manner while eliminating the current regulatory uncertainty in the U.S.A. caused by the current positions taken by the FAA vis-à-vis the Notice and that of the DOT vis-à-vis the (still deficient) Notice.

With 5,600 NCT aircrafts subject to this uncertainty NC’s may want to consider booking their slot in Aruba today before filing their next flight plan…. Oops, sorry, I forgot the FAA doesn’t require NC’s to file a flight plan……