by Matt Thurber
– March 4, 2021, 6:20 PM
The indictment of a well-known owner of an aviation title company on various charges raises an important issue regarding the responsibility borne by owner trustees when it comes to helping a non-U.S. citizen purchase an aircraft and register it in the U.S.
Debra Lynn Mercer-Erwin, the owner of Wright Brothers Aircraft Title (WBAT) and Aircraft Guaranty Corp. (AGC), was arrested in Oklahoma on Dec. 18, 2020, and was subsequently moved to Texas. On February 24, a U.S. grand jury indictment was unsealed in the case of the U.S. against Mercer-Erwin; her daughter Kayleigh Moffett, who was an officer of the companies; and six others. The indictment includes drug charges, money laundering, export violations, and aircraft registration violations.
According to the indictment, AGC acted as trustee and registered “thousands” of aircraft on behalf of foreign owners, which by itself is legal. For some unexplained reason, the indictment felt it necessary to point out that the aircraft was registered “in Onalaska Texas, an East Texas town without an airport.” Whether or not the registered address has an airport has no bearing on how trustee-registered aircraft are handled, but this seemingly extraneous information caught the attention of reporters at WFAA TV in Dallas, which wrote and produced stories about AGC and WBAT that resulted in an investigation by federal prosecutor Ernest Gonzalez and Mercer-Erwin’s subsequent arrest and the indictment.
The problem wasn’t that AGC acted as a trustee but that “defendants circumvent United States laws and regulations by placing N numbers in the hands of drug traffickers and prohibited foreign nationals,” according to the indictment.
Specifically, the indictment alleged: “First, the defendants violate FAA and Department of Commerce regulations to register aircraft with the United States while concealing the aircraft’s true ownership and exportation. Second, when law enforcement seizes a registered aircraft laden with drugs, the defendants deregister or otherwise transfer ownership of the aircraft. Finally, the defendants participated in a series of bogus aircraft sales transactions in order to conceal the movement of illegally obtained funds.”
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TRUSTEE RESPONSIBILITY
No matter who is involved in the purchase of an aircraft via a trustee, the FAA considers the trustee the owner of the aircraft. The owner is thus responsible for regulatory compliance. The responsibility held by owner-trustees for regulatory compliance is not new; the FAA pointed that out in a policy clarification in 2013, clearly outlining what it expects of aircraft owners that are also trustees for the purposes of helping a non-U.S. citizen buy an aircraft and register it in the U.S.
“The FAA does not consider the status of the trustee as the owner of the aircraft under a trust agreement as having any different effect on its responsibilities for regulatory compliance issues compared to other owners of a U.S.-registered aircraft,” the agency wrote. “The FAA has determined that there is nothing inherent in the status of a trustee owner of a U.S.-registered aircraft that would affect or limit its responsibilities for ensuring compliance with applicable laws and regulations. The FAA is not aware of any basis for treating one type of owner—such as a trustee under a non-citizen trust— differently from any other owner of a civil aircraft on the U.S. registry when considering issues of regulatory compliance.”
The investigation involved the Department of Commerce, Bureau of Industry and Security, Office of Export Enforcement, and Department of Homeland Security.
The indictment cited 22 allegedly “offending aircraft transactions,” many of which involved drug smuggling by aircraft registered with the defendant’s trust company, AGC.
One example is as follows: “On or about October 5, 2012, N305AG was registered to AGC. That same day, a Declaration of International Operation was filed by AGC for this aircraft. On or about September 11, 2018, Kayleigh Moffett filed an FAA Registration renewal. On or about January 27, 2020, N305AG was seized in Guatemala with approximately 1,700 kilograms of cocaine. The aircraft was taken into Guatemalan custody, where it has remained ever since. On or about January 29, 2020, news reports published the seizure. Two days later, on or about January 31, 2020, Kayleigh Moffett transferred ownership of the aircraft to Arrendadora SA de CV, a foreign company. AGC and its co-conspirators did not make any export filings for this transaction. On or about February 6, 2020, an open-source video of N305AG flying out of the Guatemalan jungle went viral. On or about February 20, 2020, Moffett filed a bill of sale with the FAA and asked to deregister the aircraft.”
The indictment goes on to highlight AGC’s “attempts to shirk its responsibilities by delegating regulation obligations to the foreign national.” As the FAA has repeatedly pointed out, the lessee, in this case, AGC, “is responsible for operating the aircraft in accordance and compliance with all laws, ordinances, and regulations relating to the possession, use, operation, or maintenance of the aircraft, including but not limited to, Federal Aviation Regulations.” The FAA goes on to note: “Lessee warrants it will not use the aircraft for an illegal purpose.”
PONZI PROGRAM?
A further allegation in the indictment accuses WBAT of a “Ponzi Scheme” whereby Mercer-Erwin, Moffett, and Federico Andres Machado devised a fraudulent way to earn more money. The indictment alleges that they encouraged investors to deposit money into WBAT’s escrow account typically used for aircraft transactions. But unlike a normal transaction where a loan is used to pay the seller for the aircraft, loans were sought to cover the buyer’s refundable deposit. Then the deposit money from the lender went into WBAT’s escrow account. No aircraft transaction happens because the airplane either doesn’t exist or is not for sale, according to the indictment. “WBAT transfers the refundable deposit into accounts designated by the fraudulent buyer to be used for other purposes, and not for the purchase of the designated aircraft,” it reads. “WBAT is compensated for these fraudulent transactions with money taken from the escrow account as well.”
Finally, the fake buyer gets another loan from a different lender, again for the purchase of another fake aircraft. “This loan pays for the principal and interest owed to the previous lender for the previous aircraft transaction involving WBAT and the fraudulent buyer,” according to the indictment, which includes a long list of transactions where this occurred during 2016 and 2017.
An unknown number of aircraft and dollars are tied up installed WBAT and AGC transactions, and not much information is available on what is happening with them. According to a letter sent to members from International Aircraft Dealers Association (IADA) executive director Wayne Starling on February 23, “Generally speaking, the U.S. government has halted a significant amount of the activities of each and either of these companies. While both companies continue to maintain active websites, neither company is currently conducting business.”
For those affected by this situation, IADA warned that owners of aircraft in which AGC holds the title are stuck “because the U.S. government has a general freeze on these activities.” For funds and documents that might be stuck in escrow with WBAT, the letter explained, “we are advised that the U.S. government may be making some allowance for moving funds out. If you are currently affected by this situation, we recommend you contact one of our other member-companies that handle aircraft title, legal, or escrow services in Oklahoma City for advice.”
