FAA needs tighter restrictions on private planes to combat trafficking

GAO's Director of Forensic Audits Rebecca Shea had more on Federal Drive with Tom Temin.

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Private aircraft are a favorite way to move illegal drugs and laundered money. For that reason alone, the Federal Aviation Administration needs to tighten its registration procedures for aircraft, like verifying registrants are who they say they are. That’s among the findings of a recent examination by the Government Accountability Office. GAO’s Director of Forensic Audits Rebecca Shea had more on Federal Drive with Tom Temin.

Interview transcript

Tom Temin: Ms. Shea, good to have you on.

Rebecca Shea: Thanks for having me.

Tom Temin: Now in this report, what were you generally trying to find out here? Because there’s so many aircraft and I presume they’re all safely registered with the FAA.

Rebecca Shea:  Right. Tere were a lot of things we were looking at in this report. Two primary things. Stephen Lynch (D-Mass.)and Peter King (R-N.Y.), the representatives asked us to do this work. They were interested in national security risks associated with the registry and how bad actors might defraud or abuse registration requirements, for example, by using opaque ownership structures like anonymous shell companies to register aircraft in the U.S. And also it’s part of the broader context for the work. The Fraud Reduction and Data Analytics Act required agencies to manage fraud risks in their programs. So we took a very comprehensive look at FAA’s actions to prevent, detect and respond to fraud and abuse risk. And as part of that review, we describe how the fraud and abuse risks further enable criminal safety and national security risk.

Tom Temin: Yeah, and so what did you find, that they just don’t verify information they should?

Rebecca Shea:  Well, we found a lot of things related to prevent, detect and respond. But maybe, like a 30,000-foot fly by on what the registry covers to give a little bit of context – we have a lot of fun with the aviation puns. So will continue them as long as I can. When you register an aircraft with the FAA you get with called an N number, it’s that identifier that you see on the tail of an airplane in the U.S. and that generally has a leading “N,” as in Nancy, to indicate its US registration. And there are about 300,000 private and business aircraft registered, and that’s everything from, you know, individual aircraft enthusiasts who have registered their aircraft to commercial airlines. So there can be individuals and entities that have registered, and the basic eligibility requirements generally relate to US citizenship and permanent legal residents. But you can also meet that through being a corporation or other legal structures such as a trust. Most of the folks that are registered with FAA are individual owners, but there are also a good number, 20% of corporations and LLCs and then other types of partnerships and non-citizen corporations. And what we found is that to register an aircraft, the owner submits a $5 application fee, a completed application form and documentation of ownership like a bill of sale. That’s if they’re an individual owner. And if they’re registering a business entity or trust, they’re a couple of other documents they need to submit, like articles of incorporation of the trust agreement, which FAA files away in a paper, a PDF format. And then applicants self-certify to the accuracy of that information they provide and FAA accepts that at face value. It doesn’t verify key information like identity ownership and address information. And we go through a variety of case studies to highlight the risk that are associated with various aspects of that, like not verifying applicant information.

Tom Temin:  Sure. Well, let’s back up a minute. You said self-certify and therefore, does the FAA, I guess, have the means to otherwise certify other than having the applicants self-certified?

Rebecca Shea:  Well, there are a number of things that they could do to check for the accuracy of applicants’ information like check, driver’s license information. Look at other databases. And there are a variety of recommendations that we make along those lines. And you know I can talk to you about some of the case examples that highlight some of these risks and some of the resulting frauds that came out of that.

Tom Temin:  Some fun cases might be good to discuss. Let me just remind people who we’re speaking to. This is Rebecca Shea, she is GAO’s director of forensic audits. And I guess maybe some of the case histories have to do with multiple people that own, and they put one name forward to hide the rest.

Rebecca Shea:  They can do that. There are also individuals who defraud the registry for personal gain. There’s one case that we highlight. That’s a multi-million dollar bank fraud scheme that involves an aircraft broker who forged signatures on bills of sale to register 22 aircraft in his name, and FAA accepted all of the self-certifications that it’s actually valid. And then the broker used those registration certificates from FAA that, as evidence of assets to support $3 million in bank loans for his failing business. And it was not FAA that uncovered the fraud. It was the bank. And it was about a year after the broker first submitted the fraudulent documents.

Tom Temin: Yes. So the implication there is the FAA seeing someone registered 22 planes. That’s like a tiny airline. And nobody thought, How does this guy have 22 planes?

Rebecca Shea:  Right? And this person was a broker. But he had forged signatures on the documents. And there was no verification process to check that those sales had actually been legitimate again. It’s a sort of, a, “accept as long as the documents are complete, stamp and move it on.” And one important thing from this case, why we highlight this is that as a result of the fraud, some of the rightful owners of the aircraft had trouble reinstating the registrations in their name. One owner couldn’t fly his aircraft for two years because the registration was in the name of the fraudster, and then another one had to spend a couple $1,000 in legal fees to get the aircraft registered back in his name. So the verification, it doesn’t just help the banks and the regulators it’s also important for the aircraft owners and registry users.

Tom Temin:  I mean, what you’re saying basically, is that the registration procedures can be used to steal somebody’s airplane almost.

Rebecca Shea:  That’s what happened in that case, yes.

Tom Temin:  Any other good, juicy ones?

Rebecca Shea:  And he didn’t actually have physical possession – yeah, yeah. So a couple of more juicy ones. So we also highlight the broader criminal risks that are associated with the registry fraud, in particular the use of nominees. These are like sham owners to register aircraft on behalf of an ineligible owner. And in the case that we highlight, the ineligible owner was a foreign national with links to the Sinaloa cartel. And they had used illicit funds to purchase an aircraft in the U.S. and they wanted to register it in the U.S. But in order to do that, he worked with a US corporation. This is the nominee, who filed the registration documents and represented itself as the aircraft donor to conceal that, ineligible for an owner with ties to the cartel. And again FAA accepted the registration at face value and it was the law enforcement agency that was aware of the scheme and then seized the aircraft. And you know your question earlier, about how would FAA have known about this, or what could they do? That nominee corporation that was involved in the scheme had previously been involved in similar schemes with aircraft purchases and registrations associated with drug trafficking. So if FAA had a process or system even just for checking the information on past registrations it could have easily flagged this as part of that check.

Tom Temin:  Yeah so there are a lot of moving parts to all this process, and it sounds like there needs to be more of an interagency type of verification. What were your major recommendations here?

Rebecca Shea:  Right? We made 15 recommendations around ways FAA could better prevent, detect and respond to the fraud and abuse risks, and they relate to collection and verification of information. Right now, FAA does not collect significant PII, the personally identifiable information, on applicants that would enable them to do some of these checks. And then, as I mentioned, through some of those case examples, they don’t verify the information. They also don’t store that information in an analyzable format and use it to do some analysis and detect indicators of fraud or abuse. A lot of the documents that they collect, if they do collect them on the trusts and other agreements, they store them in PDF or paper format, so it makes it very difficult to be able to analyze them or look through them for anomalies or issues. So we made recommendations along those lines, to better store and analyze information, and then also to establish more formal mechanisms for sharing information with law enforcement organizations to be able to respond to those fraud and other risks. FAA agreed with all 15 and noted some of the efforts they have under way to incorporate the solutions for the, many of the rec’s that we’ve made as part of their IT modernization efforts.

Tom Temin:  And were there, by the way, any issues connected with commercial aircraft registrations?

Rebecca Shea:  No the focus of most of our cases and the information that we reviewed in the registry data related to more on the lines of opaque ownership structures like shell companies, the non-citizen trusts and the commercial airlines – they’re publicly traded and so there’s a lot more information about them that’s out there. So that information is less opaque. We also talk about, yeah, the risks and a case study related to opaque ownership structures and how that poses problems. I could talk about that case if you’re interested.

Tom Temin: Well, let’s have the fast version.

Rebecca Shea: Okay, fast version is that we identified a case where a high net worth for national shell companies, an intermediary and a non-citizen trust to register his aircraft in 2010. And then when we reviewed the registration and trust agreement for that we identified the trustor, the presumable aircraft owner, as a company that was established in the British Virgin Islands, had an address with a post office box in Switzerland and email address indicating another trust company. And then there were two trustors identified as directors of another apparent intermediary company but the signatures were not legible. And then flash forward to 2019 that foreign national and the true owner of the aircraft, who was not evident in any way from the documents submitted to FAA, consented to a forfeiture of that aircraft and over a $1 billion in other assets as part of an agreement with [the Department of Justice]. So the lack of transparency is not just a problem for FAA and ensuring registry ineligibility. It also creates challenges for safety in law enforcement who need to have information about that. And it’s difficult for them to dig through the paper documents to be able to identify true and beneficial owners.

Tom Temin:  All right. Sounds like FAA has a job to do.

Rebecca Shea: Indeed.

Tom Temin:  Rebecca Shea is director of forensic audits at the Government Accountability Office. Thanks so much for joining me.

Rebecca Shea: Thanks for having me.

Tom Temin: We’ll post this interview along with a link to her report at www.federalnewsnetwor.com/FederalDrive. Hear the Federal Drive on demand. Subscribe at Apple Podcasts or Podcastone. Stay up to date on your agency’s latest responses to coronavirus. Visit our special resources page at www.federalnewsnetwork.com

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