After almost two years of intense debate, President Bush signed signed the USA PATRIOT Improvement and Reauthorization Act of 2005, H.R. 3199 (Reauthorization Act) on March 9, 2006. The Reauthorization Act renewed 16 provisions of the original USA Patriot Act, H.R. 3162, called the "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001" (Patriot Act), with some adjustments, just one day before such provisions were set to expire. What does the renewal mean for finance companies, equipment vendors, leasing companies and others? Will the scope of the Reauthorization Act capture more unsuspecting companies and impose more administrative burdens on them?

A primary focus of the Patriot Act and the Reauthorization Act is to identify and obstruct money laundering by "financial institutions." It may seem like that term refers only to banks and leasing companies, but its scope extends far beyond its plain meaning.

*Term to Know: A "financial institution" is a very broad term that includes institutions subject to federal regulations (such as banks, mutual funds and hedge funds), loan or finance companies, trust and insurance companies, investment banks, commercial banks and leasing companies, vehicle sellers (automobiles, aircraft and vessels), persons engaged in real estate closings and settlements, and even casinos. See: Section 352 of the Act and 31 U.S.C. Section 5312(a)(2) and (c)(1) of the Patriot Act. This definition leaves little doubt that most (if not all) lessors and lenders qualify as financial institutions. See: 31 U.S.C. 5312(a)(2)(P) and (c)(1)(A) of the Patriot Act.

Section 5318(h)(1) of the Patriot Act requires every financial institution to establish an anti-money laundering program that includes, at a minimum: (i) the development of internal policies, procedures, and controls regarding potential money laundering; (ii) the designation of a compliance officer for the program; (iii) ongoing employee training in support of the program; and (iv) an independent audit function to test programs. The Secretary of the Treasury has delegated to the Director of the Financial Crimes Enforcement Network (FinCEN) the authority to administer the Bank Secrecy Act (BSA). For more on the effect on lessors, see Lessors Take Action to Comply With the USA Patriot Act, by David G. Mayer, Business Leasing News (August 2003) and for more on the BSA, see a bank regulatory point of view at Bank Secrecy Act and Anti-Money Laundering, by the Federal Deposit Insurance Corporation. 

*Warning: The Patriot Act covers many types of transactions because of the creative ways in which terrorists can launder money. For example, a corporate aircraft purchased outside the U.S. at a discounted price could be sold at a much higher price in the U.S. to generate extra cash for terrorist activities. The Patriot Act covers aircraft and vehicle manufacturers/vendors. As a result, they will likely have to develop compliance programs. These programs require experienced legal assistance and must be molded to the particular business. Hire the appropriate legal practitioner and a seasoned risk officer at an earlier point to avoid enforcement that you may have no reason to expect.

*Tip: Consult counsel before responding to NSLs or section 215 subpoenas for advice on whether the disclosure orders are valid or overbroad. It is also important not to disclose more information than requested as that could put you outside the scope of the exceptions to the Right to Financial Privacy Act, the Fair Credit Reporting Act or other confidentiality requirements.

*Prediction: Given Congress’ re-examination of the Patriot Act and its lack of action to role back its anti-money laundering and terrorist financing provisions, in the near future we can expect to see requirements for encompassing most of the remaining sectors, including loan and finance companies, aircraft vendors, real estate brokers and vehicle dealers.

The time has come for general aviation to face up to real security risks of terrorism. Largely ignored since 9-11, terrorism risks have taken on an eerie reality in recent on-line communications by and among terrorists seeking to destroy corporate jets.

On April 13, 2006, a posting on an Arabic web forum (April 13 Threat) explained how to identify private American jets. It also urged Muslims to destroy all such aircraft as follows:

The TSA has reminded general aviation aircraft, airport owners and operators to review the security measures contained in the TSA Information Publication, Security Guidelines for General Aviation Airports and the Aircraft Owners and Pilots Association’s Airport Watch Program materials.

The National Business Aviation Association (NBAA) published the TSA information on April 25, 2006. The TSA issued an advisory titled: Advisory – Security Information for Aircraft Owners/Operators & Airport Managers. The Advisory included some of the security precautions for owners and operators to mitigate or even prevent a terrorist attack against corporate jets.

TSA suggestions indicate that owners and operators should (among other actions):

Owners and operators can take further precautions to make their aircraft less conspicuous and available terrorism targets. For example, some companies have elected to change the national registration of corporate aircraft to another jurisdiction that is more neutral and secretive, such as the Cayman Islands. Flight departments can increase security for each flight by running appropriate checklists on physical security and limiting the users of corporate aircraft only to the most selected list of directors and officers of the company. Finally, operators can change the type of aircraft they fly for a particular trip to move key personnel around in unannounced ways and use less obvious airports that accommodate their general aviation needs.

Simple answers do not exist for the complex and real threats of terrorism. Americans will likely continue to conduct business as normal with little concern for the April 13 Threat. However, terrorism is now a fact of life in the United States, and the general aviation industry can cannot afford to ignore the April 13 Threat. In the more dangerous world in which we now live, can taking greater precautions justify some marginal inconvenience and cost? Each owner and operator will have to make that decision.

Thanks again to Steve McHale, who reviewed this article.

Everyone knows how strong the Euro is against the U.S. Dollar. However, not everyone realizes that while the U.S. faces a challenging leasing market, Europe has recently shattered its records for new volume in real property and equipment leasing transactions.

While most of the U.S. looks inward at its current market with concern, is it possible that the future of leasing lies beyond U.S. borders? The 2006 IFC Industry Future Council Report, published by the Equipment Leasing & Finance Foundation (IFC Report) urges change by U.S. lessors. It highlights opportunities for leasing in the U.S. But the IFC Report also warns that U.S. lessors must not conduct business as usual if they wish to achieve their numbers or even survive in the long term. See IFC Report Questions the Future of Leasing  by David G. Mayer, Business Leasing News (April 2006).

The IFC Report poses excellent questions about the future of leasing. In part, the IFC Report highlights the potential in global markets. Many U.S. lessors consider opportunities outside of the U.S. in passing but fail to evaluate, plan and act for the future. Contrast the U.S. IFC Report with the European leasing report titled Record-breaking growth for European leasing in 2005.  Issued March 30, 2006 by "Leaseurope," the European Federation of Leasing Company Associations, the organization said:

With the annual survey of its 30-member leasing associations, Leaseurope estimates that new leasing contracts worth just above 270 billion euros were concluded during 2005, making the European leasing market the largest in the world. This figure exceeds forecasts made by the Federation and represents an increase of almost 14% compared to 2004, revealing that the leasing sector has outperformed the rest of the European economy on average. In comparison, investment levels in the EU25 increased by only 5.1% compared to 2004. Additionally, the stock of leased assets in the hands of the European leasing companies represented by Leaseurope’s national associations amounted to over 600 billion euros at the end of 2005.

Several factors are behind this impressive double digit growth. Firstly, the European market has seen substantial increases in the real estate leasing sector over the past year, with Italy being the largest market in this fast-developing business. In fact, Leaseurope estimates that this segment will have progressed by around 25% in 2005. On the equipment leasing side, growth is expected to average above 16%. The financing of road transport vehicles in particular is set to contribute to its success, with growth forecasted at 18%. . . .

The U.S. achieved approximately $220 billion in leasing volume in 2005, whereas Europe reports more than double that volume (if you consider real estate) in U.S. dollars.

In Europe, 2005 differentiated itself from prior years in several ways.

In short, these characteristics fueled the growth in both mature and emerging European markets. To measure optimism and elements of the market more accurately, Leaseurope developed a leasing barometer in 2002 by which it has tested confidence levels of its member states regarding leasing activity. In the January/February 2006 study, it found that European lessors’ confidence climbed back to the more optimistic levels of 2004 after having undergone a period of relatively subdued expectations throughout 2005. However, employment of new talent posed challenges in Europe. Predictably, that issue raised concerns and produced less than optimistic responses. See European Leasing Barometer published under "Studies and Statements" by Leaseurope (Jan./Feb. 2006).

Although the IFC Report notes the maturing and consolidating character of the U.S. markets for leasing, it also lists the product areas where growth should occur: technology, construction, power generation and transmission, transportation, healthcare and office equipment. Some of these product groups suffer from commoditization and pricing pressure, but others will garner higher returns. By contrast, Europe shows signs of opening and expanding asset types and markets for leasing of both real and personal property.

Should U.S. lessors and lessees evaluate potential business in new markets, embrace change as part of their future and diversify their operations for growth into international markets? Many lessors have already moved in that direction. Could it be that these lessors understand the way of the future?

Suppose a debtor, which is a Texas corporation (D1), grants a security interest to a secured party (SP) in a MRI machine. The machine constitutes the collateral for SP. SP perfects its security interest by filing a financing statement correctly with the Texas Secretary of State. Then, consider what happens to SP’s rights when:

1. D1, a Texas corporation, sells the MRI machine to another Texas corporation (D2-TX);

2. D1, a Texas corporation, sells the MRI to an Oklahoma corporation (D2-OK); or

3. D1, a Texas corporation, merges with and into NewCo (D2-NewCo), a Delaware corporation, with D2-NewCo being the surviving entity.

Each of these situations presents "double debtor" issues. See Sections 9-315(a)(1) and 9-317(b) of Article 9 of the Uniform Commercial Code. Each involves the continuing rights of the secured creditor in its pre-transfer and post-transfer collateral interests.

A "double debtor" question may arise when a debtor grants a security interest in collateral, such as the MRI machine to a secured party, and then the debtor transfers the collateral to another person (Examples 1 or 2) or changes its legal form, converts from one type of organization to another or merges with another entity (Example 3). In these cases, D1 is a debtor and, by virtue of provisions in Article 9, the person to whom the collateral is transferred becomes a debtor of the D1’s SP. In each case, two debtors exist, D1, the original debtor, and D2 (the second debtor), the person to whom D1 transfers the collateral, subject to the perfected security interest of SP. In different transactions illustrated in Items 1, 2 and 3 above, D1 transfers to D2-TX, D2-OK or D2-NewCo, each of whom becomes a debtor of SP. Each example, therefore, creates a "double debtor" issue under Article 9. The issue focuses on the rights of SP in the collateral and the priority to the collateral granted to SP before and after the transfer date.

In each example above, the SP’s first priority perfected security interest continues in the MRI. SP should win in a priority contest with a competing secured party of D1 with respect to the MRI. See 9-508(a). In Example 1, the security interest remains perfected because the collateral remains located in Texas where SP originally perfected its security interest. In Examples 2 and 3, Section 9-316(a)(3) provides a one-year grace period to perfect SP’s security interest in the MRI because the MRI collateral is in the hands of an organization in which filing to perfect a security interest occurred correctly in Texas. The key to the one-year grace period is that a security interest exists and is perfected at the date of transfer to the new debtor. In other words, since SP perfected its interest in the MRI in Texas originally, SP maintains its perfection in the MRI for up to one year (or the earlier expiration date of the financing statement filed to perfect SP’s interest in the MRI). Therefore, in Example 2, SP must re-perfect within one year in Oklahoma, the registered location of D2-OK. In Example 3, SP must re-perfect in Delaware, the registered location of D2-NewCo, within one year after the date of the merger.