U.S Announces new Russia Sanctions. What it means for Distributors.

Yesterday, as you are no doubt aware, the United States announced a new round of sanctions against the Government of the Russian Federation for

efforts to undermine the conduct of free and fair democratic elections and democratic institutions in the United States and its allies and partners; to engage in and facilitate malicious cyber-enabled activities against the United States and its allies and partners; to foster and use transnational corruption to influence foreign governments; to pursue extraterritorial activities targeting dissidents or journalists; to undermine security in countries and regions important to United States national security; and to violate well-established principles of international law, including respect for the territorial integrity of states.

The effect of the sanctions are to block the interests in property of certain persons (including both individuals and companies) in the technology or defense and related materiel sector, persons who have engaged in malign activities, and other persons and entities holding key roles in the Russian government or blocked entities (the full list is described in the Executive Order).

Sanctions against Russia are not a new concern for aircraft parts distributors. For many years, companies exporting to Russia have been required to review their customer and end users–as well as the individuals and entities that own or control the customers and end users–to determine whether they are subject to any of the existing sanctions regimes arising out of the situation in the Crimea region of Ukraine or other sanctions regimes imposed by the U.S. Treasury Department and administered by OFAC.

In limited cases, sanctioned persons have been corporations with a direct nexus to aviation, e.g., Rostec, Avia Group, and Avia Group Nord. In other cases, exports to entities like Aeroflot and United Aircraft Corporation may require a license depending upon facts of the transaction due to the ownership or control exercised by a sanctioned entity, like Rostec, or a high-powered individual.

The latest round of sanctions is likely to have both effects. A company called Unijet–which offers on-demand VIP business jet service–was added to the list, as well as a range of individuals and large institutions that could indirectly have a controlling interest in or position with aerospace and aviation companies.

What does all this mean for aircraft parts distributors? Unless you are doing business with one of newly listed parties, not much has changed. You already should be performing a review of your customer and obtaining detailed end user information when exporting aircraft articles to ensure compliance with OFAC sanctions (as well as BIS export regulations). When a customer, end user, or person or entity with control (more than a 50% stake) appears on the OFAC Sanctions List, you must obtain a specific license or identify an appropriate authorization prior to export.

Exports to persons in nations subject to U.S. sanctions can be tricky. Due to the nature of state-owned enterprises and monopolies, and the powerful individuals that control them, you must often dig through many layers of ownership and control to determine whether or not a blocked person is involved in the transaction. Such diligence should be memorialized in writing and kept with the other records retained for the transaction so that you can demonstrate the efforts you took to clear any red flags if the government ever asks.

Whenever you have questions about export compliance–and especially when you are dealing with customers in countries that have been subject to U.S. or international sanctions–we always recommend you consult with an export compliance attorney to help you .

NEW: US Gov’t Payroll Funding for Aviation Businesses

The US government has recognized the extreme hardship that has befallen many aviation companies and has passed legislation that will provide payroll support to aviation businesses.

This is a new program that has just been authorized and is in the process of being developed. It is known as the Aviation Jobs Manufacturing Protection (AJMP) program, but the actual scope includes more than just traditional manufacturing jobs.

The program is targeted to three categories of aviation business:

  • FAA production approval holders – this includes businesses that hold PC, PMA and/or TSOA;
  • MROs holding FAA Part 145 credentials; and,
  • Aviation businesses providing goods or services under an AS9100 system.

The ASA Community has members that fall into each of these three categories.

The legislation is found in Public Law 117-2 at sections 7201-7202. The Department of Transportation plans to publish a website with resources to facilitate application and compliance under the program (we will let you know once it is published).

What Are the Program Benefits?

In summary, under the AJMP program, the government provides money directly to program participants to subsidize a portion of their payroll

Businesses that participate in this program will have to identify an eligible group of employees who perform a targeted activity (see above). This group can be no more than 25% of your total workforce. The members in this group are limited to employees with a total compensation level of $200,000 or less per year (each).

You will commit to retain this eligible employee group, and in return the government will commit to paying up to 50% of their base pay and benefits (“total compensation“) for 6 months. The government has appropriated 3 billion dollars for this program and if the program is oversubscribed, then this amount could be reduced on a pro-rata basis (which might reduce the government’s potential commitment to each applicant).

This program is for the “retention, rehire, or recall of employees of the employer” so that means that you can use the money to rehire eligible furloughed/laid-off employees.

Example: Let’s say you are a small business that distributes aircraft parts kits under an AS9100 system and is otherwise eligible for the AJMP program. You only have 12 employees. Three of your employees are involved in the AS9100 kitting process, so you designate them as your employee group. The combined annual salary of this group is $300,000 (including base pay and benefits). This means that the government could commit to paying $75,000 (50% of the salary for six months).

Example: Let’s say you are a larger distributor that distributes new aircraft parts under an AS9100 system and is otherwise eligible for the AJMP program. You have 600 employees who are substantially all involved in the AS9100 operations. Let’s say that you designate a group of 150 employees as your employee group. The combined annual salary of this group is $22,500,000 (including base pay and benefits). This means that the government could commit to paying $5,6255,000 (50% of the salary for six months).

As long as the program requirements are met, these funds would not have to be paid-back to the government. The funds would likely be treated like a grant.

What Can You Do Now, to Prepare?

The internal government mechanisms for managing this new program are still being developed, but while we wait for the program to be formally announced, there are some things that businesses can do now to ensure that they are prepared to take advantage of the program:

  • Read the legislation to make sure you understand the terms and conditions;
  • Assess whether you meet the fundamental requirements, which include:
    • US Aviation Business meeting one of the three categories described above;
    • in 2020, you laid off 10+% of your workforce or experienced a reduction in revenues of 15+% (each as compared to correlative 2019 numbers);
  • Read the ineligibility provisions of the law and make sure you are not ineligible (and avoid ineligibliity);
  • Obtain a DUNS number, if your business doesn’t already have one, because that is a likely prerequisite for application;
  • Register in the System for Award Management (SAM.gov) because that is the most likely mechanism for government distribution of the funds;
  • Obtain AS9100 certification, if you do not otherwise meet the qualifications.

Finally, you should be thinking of the questions that you may have and sending those questions to us. ASA is generating a list of Frequently Asked Questions and sharing it with the Department of Transportation in order to let them know what the community needs to know to make the program successful. This is an ongoing process, so please share your questions with us as you think of them.

Don’t Forget to Apply for Your PPP2 Funding

As we discussed in an earlier article, the second round of Paycheck Protection Program (PPP2) loans is open. If your business qualifies, then we highly recommend applying for this government funding; but do it soon, because the March 31 deadline is approaching quickly!

Under the PP2 loan program, a business can obtain a forgivable loan. The loan must be spent on eligible expenses (like payroll, mortgage interest, utilities, rent, and certain other expenses). As long as (1) the loan it was spent on eligible expenses, (2) at least 60% of the loan was spent on payroll, and (3) employee and compensation levels are maintained, then the loan may be forgivable, which means it does not need to be repaid. As an additional bonus, the loan forgiveness does not constitute taxable income.

To qualify for the PPP2, your business must:

  • have 300 or fewer employees;
  • have previously received a First Draw PPP loan;
  • have used the full amount of the prior PPP loan only for authorized uses; and
  • have experienced at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

To meet the final bullet-point, you need to show the reduction only on in one set of correlative quarters. Most aviation industry businesses experienced at least one quarter of harsh economic circumstances in 2020 so most aviation industry businesses should qualify under this element.

The small business administration has published guidance on how to calculate your maximum loan.

Applications can typically be submitted through your local bank. There are a number of financial organizations that are also processing these loans for businesses who don’t want to use their local bank. The deadline for applying for this program is March 31, 2021.

BIS clamps down on certain exports to Myanmar (Burma)

Yesterday we wrote about the easing of restrictions on exports of articles to Sudan. We also noted that is important to always review your export transactions in accordance with your export compliance system because things can change quickly. As if to illustrate our point, the Bureau of Industry and Security yesterday promulgated rules clamping down on certain exports to Myanmar, referred to by the U.S. as Burma. This is in direct response to the actions of the Burmese military, which “perpetrated a coup wresting control of the democratically-elected government of Burma.”

The restrictions imposed by BIS are targeted at certain entities: Burma’s Ministry of Defense, Ministry of Home Affairs, armed forces, and security services. Sensitive items that require a license for export or reexport to these entities–previously reviewed on a case-by-case basis–will now be subject to a presumption of denial. Further, certain license exceptions–LVS, GBS, TSR, and APP–will no longer be available. (These exceptions are not commonly used in our industry.) This means that exports to those entities of articles that require licenses will be very challenging for the foreseeable future.

Fortunately, it appears that exports of articles to support civil aviation that do not ordinarily require an export license remain unaffected by this rule. Additionally, the more common license exceptions in our industry–RPL (Servicing and Replacement of Parts) and AVS (Aircraft, Vessels, and Spacecraft) remain available. If you are using a license exception to export remember to always review it carefully because they often have limitations.

If you are exporting to Myanmar it is very important to carefully review the facts of your transaction to ensure compliance with the latest export regulations. If you are currently exporting to any of the above-mentioned entities or otherwise shipping Myanmar pursuant to a BIS license, you should also review the special conditions on the license to determine whether the license has been affected by these regulations. As always, if you have questions you should consult your export compliance attorney.

Sudan No Longer Subject to AT1

Frequent exporters of aircraft parts (like those of you who read this blog) are probably familiar with reason for control AT1 (Antiterrorism) found in the Export Administration Regulations. Most aircraft parts and many avionic and communication articles are controlled for export purposes as ECCN 9A991.d and 7A994, respectively. These two ECCNs are controlled only for reason AT1. And as anyone who has attended an ASA export workshop knows, when we consult the Commerce Country Chart (Supplement No. 1 to part 738 of the EAR), there was a lonely, lonely X in the AT1 column next to Sudan.

But no longer.

As of last month–January 14th to be specific–Sudan is no longer designated a State Sponsor of Terrorism. As a consequence, the Bureau of Industry and Security amended the EAR to remove the Antiterrorism control from Sudan and also remove Sudan from Country Group E:1, leaving Iran, North Korea, and Syria as those countries designated as terrorist supporting countries. The consequence of this change is that the 9A991.d- and 7A994-controlled articles that make up a significant percentage of civil aircraft parts and avionics will no longer require a license for export to Sudan. It also means that Sudan, as a new addition to Country Group B, will now be eligible for several license exceptions that can make exporting parts easier. (Note that it is always important to review the exact text of a license exception you wish to use, as there are several country-specific carveouts in many exceptions.)

This has been in the works for some time, as Sudan has been engaging bilaterally with the United States and has taken steps to ensure that it has not in the past six months and will not in the future provide support for acts of international terrorism. Four years ago BIS took steps to ease the export of aircraft related items to Sudan. Prior to 2017, applications for licenses to export to Sudan were reviewed under a general policy of denial, meaning an applicant would typically have to show a compelling reason for the license to issue. In January 2017, BIS revised its licensing policy to a general policy of approval for “parts, components, materials, equipment, and technology that are controlled on the CCL only for anti-terrorism reasons and that are intended to ensure the safety of civil aviation or the safe operation of fixed-wing, commercial passenger aircraft.” Articles controlled for reasons other than AT1 (such as avionic units like AHRS controlled for reason MT1) continued to be reviewed under a general policy of denial.

Taking a more permissive stance with respect to the export of aircraft parts to support civil aviation safety is a practice we have seen in other bilateral contexts. Previously, the United States used the export of civil aircraft parts to support civil aviation safety as a carrot during the negotiations leading up to the Iran JCPOA (the Iran nuclear deal from which the U.S. later withdrew). A safe civil aviation sector is an important economic driver and everyone benefits by improving and ensuring aviation safety.

Sudan is thus open for business–at least as far as most civil aircraft parts are concerned. It is important, however, to ensure your export compliance system verifies each transaction prior to export, because the status of countries and parties can change quickly. Just because a party was clear yesterday does not mean it will be clear tomorrow, and like Sudan, just because a destination is forbidden one day does not mean it will remain forbidden forever. If you have questions about whether an export license is required to ship an article to a destination like Sudan or anywhere else, or whether a license exception applies or how to use it, be sure to check with your export compliance counsel.

Shipping Lithium Batteries

Lithium batteries can be complicated to ship by air. Most people use the IATA Dangerous Goods Regulations but the lithium battery packing instructions are not like most of the other packing instructions.

To make it easier to ship lithium batteries by air, we’ve prepared a video that goes over the special packaging, marks, labels, and documentation commonly required when shipping lithium batteries by air.

You can watch the video on youtube or just watch here on our site:

This is not a stand-alone module; this video training is meant to be a supplement to the full hazmat certification training that we offer. If you haven’t taken that training, then we recommend attending one of our classes so you can understand the scope of your compliance obligations, and then using this video to review how to follow the IATA instructions for shipping lithium batteries (in particular).

EU To Accept UK Production Releases Under EU-UK Trade Agreement

We’ve examined the Trade Agreement between the UK and EU and it provides some useful guidance on aviation safety matters. The Agreement includes an Annex that details the scope of cooperation between the UK and EU in this subject area.

UK CAA Form 1 authorized release certificates signed on the left side by the approved production organization will be accepted in the EU

Trade and Cooperation Agreement between the EU and the UK, Annex AvSaf-1 Art. 21 (31 Dec 2020).

Under the Trade Agreement, the UK and EU each agree:

  • To accept certain approvals without validation (AvSaf 3-4; Annex AvSaf-1 Art. 13):
    • Non-significant supplemental type certificates, non-significant major changes and technical standard order authorizations issued by the EU
    • Minor change / minor repair approvals issued by the UK or EU;
  • To accept through a validation process (AvSaf 3-4; Annex AvSaf-1 Art. 10):
    • EU and UK type certificates;
    • EU significant supplemental type certificates and approvals for significant major changes;
    • UK supplemental type certificates, approvals for major changes, major repairs and technical standard order authorizations
  • To accept the production approval systems of the other (AvSaf 3-4; Annex AvSaf-1 Arts. 21-23);
    • This is limited to the categories of civil aeronautical products that were already subject to that system on 31 December 2020 – later-approved categories must be subject to negotiation;
    • Within these limits, UK CAA Form 1 authorized release certificates signed on the left side by the approved production organization will be accepted in the EU;
  • To limit fees and charges to those “commensurate with the services provided” (AvSaf 13);
  • To exchange accident/incident information (AvSaf 9);
  • When one of them takes immediate measure in response to a safety threat (such as through issue of an airworthiness directive) it will inform the other within 15 days (Article AvSaf 6).

One type of approval that is noticeably absent from this list is maintenance approvals. To address this, EASA issued third-country maintenance approvals to repair stations located in the UK that had previously applied. So maintenance releases from UK-based repair stations will need to be signed under EASA authority to be acceptable in the EU.

We should expect an EU-UK implementation agreement that further explains the mechanisms for acceptance and validation between the two jurisdictions.

There are some remaining issues, especially with respect to multi-country transactions. For example, nations outside of the EU, Canada, Japan and the US will need to decide whether to accept UK approvals. This could make things tricky when dealing with other jurisdictions: China comes to mind as a significant market for which a decision about acceptance of UK releases will need to be made.

New Military-Intelligence Rules Apply to Certain Transactions

New US rules published today create new restrictions on support of certain military-intelligence end uses and end users. This will authorize the addition of new entities to the export control lists, and will also impose a de facto requirement to ensure your transactions are not supporting restricted military-intelligence end uses. This new restriction comes on the heels of new restrictions related to military end uses and military end users.

15 C.F.R. is being amended to create new restrictions on the support of certain military-intelligence end uses and end users.

The specific restrictions apply to transactions – of any item subject to the Commerce Department export regulations – because there is an unacceptable risk of use in, or diversion to, a ‘military-intelligence end use’ or a ‘military-intelligence end user’ in the People’s Republic of China, Russia, or Venezuela; or a country listed in Country Group E:1 or E:2 (currently Cuba, Iran, North Korea, Sudan and Syria).

Two key definitions are also added to the regulations, to explain the scope of the new restrictions:

Military- intelligence end use’ means the design, ‘‘development,’’ ‘‘production,’’ use, operation, installation (including on-site installation), maintenance (checking), repair, overhaul, or refurbishing of, or incorporation into, items described on the U.S. Munitions List (USML) (22 CFR part 121, International Traffic in Arms Regulations), or classified under ECCNs ending in ‘‘A018’’ or under ‘‘600 series’’ ECCNs, which are intended to support the actions or functions of a ‘military- intelligence end user,’ as defined in this section.

15 C.F.R. § 744.22(f)(1) (March 16, 2021).

Military-intelligence end user’ means any intelligence or reconnaissance organization of the armed services (army, navy, marine, air force, or coast guard); or national guard. For license requirements applicable to other government intelligence or reconnaissance organizations in China, Russia, or Venezuela, see § 744.21 of the EAR. Military-intelligence end users subject to the license requirements set forth in this § 744.22 include, but are not limited to, the following:

(i) Cuba. Directorate of Military Intelligence (DIM) and Directorate of Military Counterintelligence (CIM).

(ii) China, People’s Republic of. Intelligence Bureau of the Joint Staff Department.

(iii) Iran. Islamic Revolutionary Guard Corps Intelligence Organization (IRGC– IO) and Artesh Directorate for Intelligence (J2).

(iv) Korea, North. Reconnaissance General Bureau (RGB).

(v) Russia. Main Intelligence Directorate (GRU).

(vi) Syria. Military Intelligence Service.

(vii) Venezuela. General Directorate of Military Counterintelligence (DGCIM).

15 C.F.R. § 744.22(f)(2) (March 16, 2021).

In summary, the recent expansion to the military end use/user rules is further expanded to include military intelligence services (in the seven affected countries) as well.

The most difficult compliance target may be China, because of the complicated manner in which the private sector and the state are intertwined (and also because of the large volumes of trade between these two nations). Compliance in China in particular will require special attention to detail, and to ensuring that regulatory obligations are understood and that compliance is well-documented.

The new rules apply to both direct exports and also to certain transactions that are not U.S. exports. There are some limited, specific cases where the U.S. export laws apply to transactions that are not U.S. exports. The best known case is re-exports, where U.S. origin products that are exported from one third-country location to another are nonetheless subject to U.S. export regulations.

Another special case involves weapons of mass destruction, the restrictions for which have been summarized in subsection 730.5(d). Current regulations provide:

(d) U.S. Person Activities. To counter the proliferation of weapons of mass destruction, the [Export Administration Regulations] restrict the involvement of “United States persons” anywhere in the world in exports of foreign-origin items, or in providing services or support, that may contribute to such proliferation.”

15 C.F.R. § 730.5(d) (2020).

In today’s Federal Register, the government expanded the scope of subsection 730.5(d) to read as follows (note that restrictions on missiles and nuclear, chemical, and biological weapons already existed in the regulations, but the text dealing with them is also expanded in the new rule change):

(d) ‘‘U.S. person’’ activities. The[Export Administration Regulations] restrict specific activities of ‘‘U.S. persons,’’ wherever located, related to the proliferation of nuclear explosive devices, ‘‘missiles,’’ chemical or biological weapons, whole plants for chemical weapons precursors, and certain military-intelligence end uses and end users, as described in § 744.6 of the [Export Administration Regulations].

15 C.F.R. § 730.5(d) (March 16, 2021).

This should be of note to ASA members because it expands the scope of this rule to include certain military-intelligence end uses and end users – which means that some transactions that are not strictly U.S. exports will nonetheless be restricted when the participants include U.S. persons.

The new regulation is an interim final regulation. It is exempt from the APA’s requirements for notice and comment so it will go into effect on March 16, 2021 without comment. In the interest of effective rule-making, the government is nonetheless collecting comments on this rule.

As always, if you think that your transactions may be affected by the new rule, please consider seeking our legal advice to support your compliance program.

Applications Are Opening for PPP2 Forgivable Loans

As we announced in our December 29th article, Congress has authorized a second draw Payroll Protection Program (PPP2).

The PPP2 loan program is very much like the first round, in that it is a loan that can be forgiven if the proceeds are spent on appropriate authorized expenditures (like payroll). But there are a few differences…

The most important of these differences is that the second draw PPP will be limited to businesses that can show an adverse effect from Covid-19. Nearly all of ASA’s members have been dramatically affected by Covid-19 so hopefully most of our members will be eligible for this program. The manner in which you must show adverse effect is by comparing your 2020 quarterly gross receipts with those of the corollary 2019 quarter. If you can demonstrate that your quarterly gross receipts dropped by 25 percent or more from the corollary 2109 gross receipts for the same quarter, then you meet this prong of the eligibility test. There are also special rules if you were not in business for all of 2019.

Another change is that the maximum business size drops from 500 employees (for PPP) down to 300 employees (for PPP2).

Please note that there are other detailed requirements not repeated in this blog article!

The SBA has published information on PPP2 loans. One particularly useful document explains how to calculate your maximum loan. The SBA information includes a model application form for PPP2 loans. Expect your bank’s application form to look similar but it may not be exactly the same. It appears that some banks have begun to accept applications for PPP2 loans, while others have not yet begun to accept them (but ought to be doing so, soon).

Payroll Support Program Deadline is Tonight

If you are an air carrier or a contractor to an air carrier then you probably already applied for the Payroll Support Program financing last year. Congress has authorized a second round of funding and the first deadline for application is midnight tonight (January 14, 2021). Applications received after 11:59 p.m. EDT tonight will be considered, but may not be processed as quickly.

Information about the second Payroll Support Program, or PSP2, can be found on the Treasury Department’s website at https://home.treasury.gov/policy-issues/cares/preserving-jobs-for-american-industry/psp2.

Additional information can be found in these two documents:

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