The Truth about Back-To-Back Transactions

The Truth about Back-To-Back Transactions

In and amongst the many different operation, technical and jurisdictional details in an aircraft transaction, one thing to look for is how title is being transferred to you. Some scenarios can involve certain structures that may or may not be in the interest of the buyer or seller. One such scenario to be aware of is what is called a “back-to-back” structure.

A back-to-back transaction is when an intermediary (i.e. a non-principal who is working as a person in the middle) simultaneously buys and resells an aircraft; thus, they are standing in between the buyer and seller. The intermediary will take title of the aircraft and simultaneously sell the title. The intermediary will buy the aircraft at X price and sell it at X plus price. In the overwhelming majority of cases, the intermediary does not put any money up and uses the buyer’s deposit for their own deposit but puts it in their name contractually signalling that it is their money.

There is nothing illegal about taking title to an aircraft and selling it at a higher price. It starts to get unethical, and sometimes illegal, when a back to back transaction is done to hide a mark up or commission that neither buyer nor seller would agree to or to pay an elicit fee to an insider involved in one of the parties.

One could argue that a sophisticated buyer or seller should be doing their research and due diligence and if they are happy with the price, they’ve contractually agreed to then they are fine with everything else. However in many circumstances, the back to back deal is used to bury a large sum of money that a buyer or seller would never agree to pay, or because it is usually being used to pay people (on either side) in return for the access or ability to do the deal. For example, a member of a flight department may push for a certain broker to be used because he knows they will get paid by that broker.

To be clear, this is not the agreed fee paid to your aircraft broker. There is a lot of hard work that goes into mediating a transaction for a client and the work should be compensated and agreed upfront. But it should always be disclosed. By law in the UK and for all companies operating in the UK, all payments must be made clear and disclosed (The Bribery Act 2010).

There are definite risks to being involved in a back-to-back transaction.

  • When you buy from an intermediary who does not have title of the aircraft, you may be holding up your contractual side of the transaction but have no understanding of the other contractual obligations the intermediary has with the seller. For example, a buyer may have agreed to a certain delivery condition that the intermediary failed to notice and include in his contract with the seller. The actual seller will have no obligation to honour the delivery condition of the end buyer because their contract is with the intermediary. A default on one end and not the other can get very awkward and complicated as the intermediary usually does not have the money to rectify issues such as this.
  • From a buyer’s point of view, the intermediary is using your money as his deposit, so if things go bad on their end of the contract, your deposit may be frozen even if you have not defaulted on the contract you have signed.
  • During the Pre-Purchase Inspection, the end buyer’s contract is with an entity who does not actually own the aircraft and therefore is not the right signatory to authorize work. It can get very messy and time consuming.
  • If the deal is involving exports and imports, especially for customs purposes, the added layers of intermediaries can be very complicated as the aviation and customs authorities will usually only recognize the ultimate seller and ultimate owner.

In essence there is nothing wrong with a back-to-back transaction if all parties know about it and can work through these issues.

There are even a few times when a back-to-back transaction is ideal. If a buyer wants to include pilot training, cosmetic or avionics upgrades or similar in his bank loan or for tax purposes, it can make sense to have an intermediary sign the contract with the seller at the purchase price and then have a second contract signed by the actual buyer with the higher price for whatever purpose the buyer needed. All parties can be made aware of the structure and proceed in the best way for everyone.

A back-to-back is NOT when an intermediary actually has the money for the aircraft and is purchasing the aircraft with their own funds whether to own or in a trade transaction. They will usually be very open about this structure.

How to know if you are involved in a back-to-back transaction:

  • Ask to see the title or last Bill of Sale for the aircraft. Compare the names with who you are signing your contract with. We have been in a situation where the names did not match and when asked for a copy of the Bill of Sale, the intermediary actually forged a bill of sale with their name on it. A few things in it did not add up in the document that signalled it might not be authentic and we quickly exited the transaction.
  • If things are sounding or looking suspicious, ask questions. The more you know, the better you can protect yourself.

A back-to-back is not a reason to walk away from a transaction, but it is a reason to ask questions and see if you are comfortable with the structure. You might be ok with it or not care and can proceed. But we advise knowing the structure of the deal in detail, and if possible, dealing directly with end buyer or seller and keeping everything disclosed and open.