The issue of embargoes is having an increasing impact on the aviation business. The impact of embargoes is particularly being felt more and more keenly in aircraft leasing where those embargoes have an impact in the jurisdiction in which either the lessee or the lessor are located or the leasing arrangements otherwise have a close link to a country subject to restrictive measures. As the EU is one of the key players in respect of setting embargoes, this article will focus on how the embargo system works in the EU and how the EU's restrictive measures may in particular affect aircraft leasing. It will then also consider how lessors or lessees may mitigate the risks arising from the circumstances when an embargo situation exists.
How are embargoes established in the EU?
The EU (i.e. the European Parliament and the Council) adopt EU Regulations, imposing economic and financial restrictive measures against third countries (the EU Embargo Regulations).
In the past years, the EU has adopted restrictive measures either on an autonomous basis or by implementing binding Resolutions of the Security Council of the United Nations.
What do embargoes cover?
Embargo is a generic concept which refers to sanctions against third countries. The sanctions vary in severity.
Total bans on trade are extremely rare, for example the total embargo against Iraq/Kuwait in 1990. The more common cases involve a prohibition to supply, sell, transfer, or procure specific goods or technologies (e.g. nuclear related).
Flight restrictions have been used in the past in respect of air traffic, including the 1998 embargo against Yugoslavia - Serbia and Montenegro. In the EU's recent practice, flight restrictions are not frequently met, unless they pertain to the cargo transport of restricted goods (e.g. weapons).
Targeted (smart) financial sanctions are increasingly used. The EU has often imposed sanctions designed to target specific responsible persons, groups and entities. The most common type is the fund freezing. The envisaged persons are typically enumerated on lists annexed to the EU Embargo Regulations (the Black Lists). In recent times this has included a Zimbabwe Black List of a number of European companies associated with Mugabe's regimes. Individuals on the Black List have had assets frozen and been barred from travelling within the EU.
How specific can the EU sanctions be in connection to aircraft leasing?
Restrictions in respect of aircraft leasing will commonly be implicit in the general measures imposed. For example, a total ban on trade with a specific country would include the leasing of aircraft to or from entities operating in that jurisdiction. It is unlikely that there will be specific provisions relating to aircraft leasing but the ban will be inferred.
There may though be an explicit total ban in relation to aircraft, for example during the Serb-Croat conflict when "all vessels, freight vehicles, rolling stock and aircraft in which a majority or controlling interest was held by a person or undertaking in or operating from the Federal Republic of Yugoslavia"1 shall be "impounded by the competent authorities of the Member State"2.
In relation to restrictions of leasing operations, some common strands can be found from current embargoes in force (for example in relation to Iran, North Korea, Sudan, Somalia and Libya), namely:
- although used in the past and not excluded as an option, currently it is less common to find a general ban imposed on trade or flights and as a consequence on leasing in general;
- lease agreements may however be restricted where a connection can be established between the leasing operation and one of the "critical areas" covered by the embargo (e.g. leasing of aircraft used for military purposes or to transport cargo of banned products);
- there may be an issue where the leasing involves transfer of funds to or from persons or entities on a Black List (e.g. Farasakht Industries or Aerospace Industries Organization in Iran). If an EU lessor is on the Black List an EU lessee cannot make payments to an account in a jurisdiction where the embargo does not apply as this would circumvent the freezing order. Any lessee payment to the blacklisted lessor can only be made into a blocked account i.e. one from which the lessor is not able to withdraw funds; and
- there may also be an issue where an EU lessor receives payments from a lessee on the Black List where payments relate to frozen funds.
Scope of EU embargoes
As a general rule, economic and financial restrictive measures, including targeted financial sanctions, have to be applied by all persons and entities doing business in the EU, including nationals of non-EU countries, and also by EU nationals and entities incorporated or constituted under the law of an EU Member State when doing business outside the EU.
In the Bosphorus Airways case for example, a Turkish air carrier (lessee) was operating 4 aircraft under a dry lease agreement with a Yugoslavian company (lessor). One aircraft was arrested at Dublin airport for having breached the embargo against Yugoslavia. The ECJ held that the restrictions applied to an aircraft owned by an undertaking based in or operating from the country under embargo (i.e. Yugoslavia), even though the owner had leased it to another undertaking which had no connection (i.e. location or shareholding related) with that country.
The EU establishes sanctions on a case-by-case basis and it is unlikely that the EU would directly target aircraft leasing. These types of agreements may nonetheless be affected if, given their specific object, they fall under an area of restriction. The following steps are therefore recommended in each case of a new contract:
- Check whether the lessor or the lessee or one of their controlling shareholders is located in a country under embargo, or if the leased product is designed for use in the country under embargo.
- Check the provisions of the applicable EU Embargo Regulations. Pay particular attention to the list of natural persons and legal entities on the Black Lists.
- Avoid entering into lease agreements in any one of the
- where there is a total ban on the trade or financing activities with a third country;
- where there is suspicion that the leased aircraft may be used in connection with banned products or operations under the EU Embargo Regulation (e.g. weapons, nuclear material);
- where one of the parties (lessor or lessee) is a person enumerated on the Black Lists or controlled by such person.
Where leasing contracts are already being performed prior to an embargo entering into force, the EU Embargo Regulations will often contain provisions exempting the contracts already in existence for the purpose of the imposed sanctions.
Michael Jürgen Werner is a partner and Raluca Marian is a consultant in the Antitrust, Competition & Regulatory team, Norton Rose LLP, Brussels.
1. Federal Republic of Yugoslavia (Serbia and Montenegro).
2. Art. 8 of Council Regulation (EEC) No 990/93.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.