Volkswagen pleads guilty to US criminal charges, agrees to pay $4.3 billion; Six VW executives indicted with conspiracy to cheat US emission tests

11 January 2017

The US Department of Justice (DOJ) announced today that Volkswagen AG has agreed to plead guilty to criminal felony charges and pay a $2.8 billion criminal penalty as a result of a scheme to sell 590,000 diesel vehicles in the United States by using a “defeat device” to cheat on US EPA and California ARB emission tests, and lying and obstructing justice to further the scheme.

In separate civil resolutions of environmental, customs and financial claims, VW has agreed to pay $1.5 billion. This includes EPA’s claim for civil penalties against VW in connection with VW’s sale of these cars, as well as US Customs and Border Protection (CBP) claims for customs fraud. The agreements also resolve alleged violations of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).

Criminal Case. VW has been charged with participating in a conspiracy to defraud the United States and VW’s US customers and to violate the Clean Air Act by lying and misleading the EPA and US customers about whether certain VW, Audi and Porsche diesel vehicles complied with US emission standards, using cheating software to circumvent the US testing process and concealing material facts about its cheating from US regulators. VW has been also charged with obstruction of justice for destroying documents related to the scheme, and with a separate crime of importing these cars into the US by means of false statements about the vehicles’ compliance with emissions limits.

Under the terms of the plea agreement—which must be accepted by the court—VW will plead guilty to all these charges, will be on probation for three years, will be under an independent corporate compliance monitor who will oversee the company for at least three years. Volkswagen also agreed to fully cooperate in the DOJ’s investigation and prosecution of individuals responsible for these crimes.

In connection with the investigation, a federal grand jury in the Eastern District of Michigan returned an indictment today charging six VW executives and employees for their roles in the nearly 10-year conspiracy. The list of indicted VW personnel includes:

1. Heinz-Jakob Neusser: from July 2013 until September 2015, Neusser worked as head of Development for VW Brand and was also on the management board for VW Brand. From October 2011 until July 2013, Neusser served as the head of Engine Development for VW.
2. Jens Hadler: from May 2007 until March 2011, Hadler worked as head of Engine Development for VW.
3. Richard Dorenkamp: from 2003 until December 2013, Dorenkamp worked as the head of VW’s Engine Development After-Treatment Department in Wolfsburg, Germany. From 2006 until 2013, Dorenkamp led a team of engineers that developed the first diesel engine that was designed to meet the US Tier 2 emissions standards.
4. Bernd Gottweis: from 2007 until October 2014, Gottweis worked for VW as a supervisor with responsibility for Quality Management and Product Safety.
5. Oliver Schmidt: from 2012 through February 2015, Schmidt was the General Manager in charge of the Environment and Engineering Office, located in Auburn Hills, Michigan. From February 2015 through September 2015, Schmidt returned to VW headquarters to work directly for Neusser, including on emissions issues.
6. Jürgen Peter: Peter worked in the VW Quality Management and Product Safety Group from 1990 until the present. From March 2015 until July 2015, Peter was one of the VW liaisons between the regulatory agencies and VW.

The DOJ provided the following summary of developments in the VW diesel emission case:

In 2006, VW engineers began to design a new diesel engine to meet stricter U.S. emissions standards that would take effect by model year 2007. This new engine would be the cornerstone of a new project to sell diesel vehicles in the United States that would be marketed to buyers as “clean diesel,” a project that was an important strategic goal for VW’s management. When the co-conspirators realized that they could not design a diesel engine that would both meet the stricter NOx emissions standards and attract sufficient customer demand in the U.S. market, they decided they would use a software function to cheat standard U.S. emissions tests.

VW engineers working under Dorenkamp and Hadler designed and implemented a software to recognize whether a vehicle was undergoing standard U.S. emissions testing on a dynamometer or it was being driven on the road under normal driving conditions. The software accomplished this by recognizing the standard published drive cycles. Based on these inputs, if the vehicle’s software detected that it was being tested, the vehicle performed in one mode, which satisfied U.S. NOx emissions standards. If the software detected that the vehicle was not being tested, it operated in a different mode, in which the vehicle’s emissions control systems were reduced substantially, causing the vehicle to emit NOx up to 40 times higher than U.S. standards.

Disagreements over the direction of the project were articulated at a meeting over which Hadler presided, and which Dorenkamp attended. Hadler authorized Dorenkamp to proceed with the project knowing that only the use of the defeat device software would enable VW diesel vehicles to pass U.S. emissions tests. Starting with the first model year 2009 of VW’s new “clean diesel” engine through model year 2016, Dorenkamp, Neusser, Hadler and their co-conspirators installed, or caused to be installed, the defeat device software into the vehicles imported and sold in the United States. In order to sell their “clean diesel” vehicles in the United States, the co-conspirators lied to the EPA about the existence of their test-cheating software, hiding it from the EPA, CARB, VW customers and the U.S. public. Dorenkamp, Neusser, Hadler, Gottweis, Schmidt, Peter and their co-conspirators then marketed, and caused to be marketed, VW diesel vehicles to the U.S. public as “clean diesel” and environmentally-friendly.

Around 2012, hardware failures developed in certain of the diesel vehicles. VW engineers believed the increased stress on the exhaust system from being driven in the “dyno mode” could be the cause of the hardware failures. In July 2012, VW engineers met with Neusser and Gottweis to explain what they believed to be the cause of the hardware failures and explained the defeat device. Gottweis and Neusser each encouraged further concealment of the software. In 2014, the co-conspirators perfected their cheating software by starting the vehicle in “street mode,” and, when the defeat device realized the vehicle was being tested, switching to the “dyno mode.” To increase the ability of the vehicle’s software to recognize that it was being tested on the dynamometer, the VW engineers activated a “steering wheel angle recognition feature.” With these alterations, it was believed the stress on the exhaust system would be reduced because the engine would not be operating for as long in “dyno mode.” The new function was installed in existing vehicles through software updates. The defendants and other co-conspirators falsely represented, and caused to be represented, to U.S. regulators, U.S. customers and others that the software update was intended to improve durability and emissions issues in the vehicles when, in fact, they knew it was used to more quickly deactivate emission control systems when the vehicle was not undergoing emissions tests.

After years of VW selling their “clean diesel” vehicles in the United States that had the cheating software, in March 2014, West Virginia University’s Center for Alternative Fuels, Engines and Emissions published the results of a study commissioned by the International Council on Clean Transportation (ICCT). The ICCT study identified substantial discrepancies in the NOx emissions from certain VW vehicles when tested on the road compared to when these vehicles were undergoing EPA and CARB standard drive cycle tests on a dynamometer. Rather than tell the truth, VW employees, including Neusser, Gottweis, Schmidt and Peter, pursued a strategy to disclose as little as possible – to continue to hide the existence of the software from U.S. regulators, U.S. customers and the U.S. public.

Following the ICCT study, CARB, in coordination with the EPA, attempted to work with VW to determine the cause for the higher NOx emissions in VW diesel vehicles when being driven on the road as opposed to on the dynamometer undergoing standard emissions test cycles. To do this, CARB, in coordination with the EPA, repeatedly asked VW questions that became increasingly more specific and detailed, and tested the vehicles themselves. In implementing their strategy of disclosing as little as possible, Neusser, Gottweis, Schmidt, Peter and their co-conspirators provided EPA and CARB with testing results, data, presentations and statements in an attempt to make it appear that there were innocent mechanical and technological problems to blame, while secretly knowing that the primary reason for the discrepancy was their cheating software that was installed in every VW diesel vehicle sold in the United States. The co-conspirators continued this back-and-forth with the EPA and CARB for over 18 months, obstructing the regulators’ attempts to uncover the truth.

Oliver Schmidt was arrested on January 7, 2017, in Miami during a visit to the United States. The other defendants are believed to presently reside in Germany, said the DOJ. It remains unclear whether they would ever appear in a United States court—it is unlikely that Germany would extradite its citizens.

Holding executives accountable for corporate crime has been generally uncommon. In 2015—following criticism that the agency was too lenient on Wall Street executives after the financial crisis—the DOJ issued new policies that prioritized the prosecution of individuals at corporations accused of wrongdoing. The VW case appears to be the first significant test of these new policies.

Civil Resolutions. In addition to the $2.8 billion in criminal penalty, three civil settlements have been reached, where VW agreed to pay a total of $1.50 billion in civil penalties. The civil penalties are also in addition to the $14.7 billion settlement that addressed the 2.0 liter cars, and the $1 billion settlement that addressed the 3.0 liter car emissions.

The first civil settlement resolves the EPA’s complaint that VW violated the Clean Air Act by selling vehicles equipped with defeat devices that during normal operation emit pollution significantly in excess of EPA-compliant levels. The second civil settlement resolves civil fraud claims by the US Customs and Border Protection (CBP), who alleged that at the time of importation, VW falsely represented to CBP that each of the nearly 590,000 imported vehicles complied with all applicable environmental laws, knowing those representations to be untrue. VW has agreed to pay $1.45 billion to resolve the civil penalty claims by the EPA and the CBP.

In the third civil settlement, VW has agreed to pay $50 million in civil penalties for alleged violations of FIRREA. These alleged violations were linked to certain irregularities in the financing arrangements during the loan and lease transactions of VW vehicles.

Source: US DOJ