On 18th September 2015 the Environmental Protection Agency (EPA) in the US announced that Volkswagen had violated the Clean Air Act by unlawfully installing “defeat device” software into certain diesel cars between 2009 and 2015 that allowed the cars to cheat emissions tests. The EPA ordered VW to recall approximately half a million cars in America to fix the software. 

On 22nd September 2015 VW admitted that it had installed software on 11 million of its diesel cars worldwide which enabled them to pass America’s stringent nitrogen oxides (NOX) tests. Once the cars were out of the laboratory the software deactivated their emission controls, and the cars began to emit fumes at up to 40 times the permitted US level.   

If the alleged Libor manipulation scandal is any benchmark for the emissions crisis, we can expect to see large financial penalties imposed against VW in the US (possibly followed by other jurisdictions) with criminal investigations then being started on both sides of the pond.  

At the moment VW is at risk of a maximum fine of $37,500 per offending vehicle sold in the US. On the basis that 482,000 were sold, that figure could total up to $18 billion.  In one sense such a hefty fine only punishes the shareholders who have already suffered huge financial losses. Arguably it also limits the R&D resources available to the company for future emissions and other innovation, thereby hampering the industry as a whole.

That is why it is hoped that the US Department of Justice (DoJ) will honour the sentiment of its new policy memorandum (known as ‘the Yates Memorandum’) issued on 9th September 2015 which covers the prosecution of individuals in corporate fraud cases. The memo places a stronger emphasis on the investigation and prosecution of corporate executives than ever before. Sally Yates, the US Deputy Attorney-General, has stated that from now on, fining businesses will take second place to pursuing criminal and civil charges against individuals. The memo makes clear that ‘to qualify for any co-operation credit whatsoever, in both criminal and civil cases, corporations under investigation must provide the DoJ with all relevant facts about the individuals involved in corporate misconduct’.  

The change in emphasis should ensure that the decisions of the DoJ become more transparent, particularly as against foreign firms.  Most of the recent banking scandals have resulted in opaque out of court settlements and large corporate fines.  Earlier this month, the DoJ announced a $900 million settlement with General Motors for failing to recall cars with an ignition switch defect blamed for crashes which killed at least 124 people and injured 275.  Prosecutors said (unnamed) managers at GM had knowingly ignored the potentially deadly effects of the fault, and put profit before safety.  The agreed settlement figure was part of a deferred prosecution agreement. Some will argue that GM reached agreement just in time.

The class action lawyers in the US will be rubbing their hands with glee at the prospect of actions brought on the basis that consumers were mis-sold their diesel cars, traditionally an unpopular form of engine in the petrol-dominated US car market.  Some will regard such claims with cynicism on the basis that the cars were unlikely to have been bought for the sole reason that they emitted the specified levels of pollutants.  Such cynicism might be misplaced.  In Europe we are not in a position to judge how important the outcome of those tests were to the US consumer, not least as this whole episode has revealed quite how unfit for purpose and open to abuse European emissions tests are. Once again it appears to fall to the US to highlight the inadequacies of some of our own regulatory systems.  It can only be hoped that, in the event that US car manufacturers are found to be operating similar practices, that the DoJ will investigate them with the same vigour as VW.