As VW’s emissions scandal shows, it’s a long road to justice
Prosecutors, regulators lament the obstacles of pushing accountability to the very top
If prosecutors make this stick, the case will have international reverberations.
I’m referring to the fraud charges laid this week by German prosecutors against former Volkswagen CEO Martin Winterkorn.
Yes, the VW emissions scandal, or Dieselgate if you prefer, has been a preoccupation of mine, initially because of the sheer audacity of the automaker to devise emissions cheating software in order to fake compliance with U.S. emissions controls.
Later, because of the strikingly deep history of VW and other car manufacturers devising workarounds in order to falsely show compliance with the U.S. Clean Air Act.
Over the years, enforcement actions have been taken by the Environmental Protection Agency (EPA) against Chrysler, Toyota, Ford, Honda, General Motors. In the case of Volkswagen, the EPA found that the German carmaker failed to disclose auxiliary emission control devices, or defeat devices, on 25,000 VWs manufactured in 1973. Some readers of this column may not even have been born yet.
More than four decades later, it was not the EPA, but rather the Center for Alternative Fuels Engines and Emissions at the University of West Virginia that uncovered the latest scandal. The non-profit research centre had been commissioned to do an emissions testing study on light-duty diesel
vehicles for the International Council on Clean Transportation in the spring of 2014.
The results of that study led to the EPA’s first allegations, in September 2015, that defeat devices on Volkswagen vehicles equipped with two-litre diesel engines (Jettas, Beetles, Golfs, Passats) allowed those vehicles to emit as much as 40 per cent more pollution in normal driving than during testing on dynamometers that simulate road conditions. Two months later, the EPA, which would later conduct an internal audit to attempt to explain how such a years-long deceit had failed to gain notice, alleged that similar devices had been installed on vehicles with three-litre diesel engines (Touaregs, Audis, Porsches), allowing those cars to surpass emissions standards by as much as nine times.
The cheating software had been installed as early as 2006 as the automaker pushed ahead on its goal to become, under Winterkorn, the world’s largest automaker.
U.S. enforcement action has been robust. In January 2017, the U.S. Department of Justice announced that Volkswagen had agreed to plead guilty to defrauding customers and violating the Clean Air Act over the sale of approximately 590,000 vehicles. In addition to $2.8 billion (U.S.) in criminal penalties, the largest criminal fine ever levied against an automaker, a civil penalty of $1.5 billion was imposed against the company. Fines to date now exceed $30 billion.
Six Volkswagen employees were indicted. But not Winterkorn.
That changed a year ago, when U.S. prosecutors charged Winterkorn with wire fraud and conspiracy. The indictment alleges that Winterkorn was aware that diesel emissions were being tampered with as early as 2014 and that he failed to take any action.
Satisfaction? Of course not. Yet again we listened to the lament of prosecutors and regulators about the obstacles of pushing accountability for corporate criminality to the very top of the enterprise, doubly difficult in this case as the retired Winterkorn — he resigned from Volkswagen days after the fraud was revealed — resides in Germany and thus is beyond the reach of U.S. prosecutors. And so sits the warrant issued for his arrest.
When the U.S. Securities and Exchange Commission announced it was suing Winterkorn for defrauding investors, Volkswagen sniffed that the SEC was just “piling on.”
Winterkorn never did face questioning by American lawmakers. Appearing before a German parliamentary committee, he was asked whether he knew of the cheating scandal prior to August 2015. “This is not the case,” the former CEO responded. “It’s incomprehensible why I wasn’t informed early and unambiguously.”
How could this happen? Winterkorn, too, was puzzled. “From outside it is difficult to comprehend how something like this could happen at a company that is so much preoccupied with quality,” he told parliamentarians. “Even I don’t.” (This recalls, though certainly doesn’t prove, the “conscious avoidance” or “deliberate ignorance” strategy that sunk the case for Enron’s Ken Lay.)
What did happen in the spring of 2014, more than a year prior to the point at which Winterkorn said he was informed? In March 2016, Volkswagen issued a background statement documenting the company’s internal timeline of events. It is known that in May 2014, the International Council on Clean Transportation informed the California Air Resources Board of the emissions irregularities. On May 23, Volkswagen stated in its own account, a memo about the study was prepared for Winterkorn. “This memo was included in his extensive weekend mail,” the account states. “Whether and to which extent Mr. Winterkorn took notice of this memo at that time is not documented.”
In laying fraud charges now, German prosecutors have followed the U.S. lead in time-stamping Winterkorn’s point of knowing to this moment. What was or wasn’t documented at that juncture isn’t publicly known. Winterkorn’s lawyer did not respond to German media’s request for comment.
But you can bet that CEOs everywhere are alert to the frustrations of shareholders, consumers and jurists who want to see justice being done at the very top levels of a corporation.